Arguments for protectionism
- Protecting domestic employment: Industries in decline> sunset industries> cannot compete with foreign competition> high structural unemployment. LIMITATION: may continue to decline, just prolongs the process and structural chnages are better as there is reallocation of resources.
- Infant Industry: Protects new sunrise industries> unable to compete> economies of scale> higher costs. Protect until they reach a size EOS. LIMITATIONS: they may become reliant, inefficient remain uncompetitive.
- Avoid specialisation: May want to limit over specialisation and being over dependent on export of one/two products. Prone to changes in world market demand. detrimental to EG. LIMTATIONS: difficulties in identifying, inefficiencies in allocation
- Strategic reasons: Certain industries need to be protected such as high tech> could serve as a source of future economic growth, require protection until. LIMITATIONS: difficult to identify industries
- Preventing Dumping: Eliminates unfair trade advantage of trading partners> export goods below MC, domestic industries severely amazed. LIMITATIONS: Difficult to prove dumping, lower price could be due to cost advantages.
- Raise government revenue: Tariffs are a source, easy to implement. LIMITATIONS: regressive, worsens resource allocation, consumers bear loss.
- Correction of balance payments deficit: Restricting imports> improve BOP in current account considering exports remain unchanged. LIMITATIONS: high risk of retaliation> harming exports.
Arguments against protectionism
- Distorts comparative advantage: inefficient use of worlds resources, specialisation reduced> lower global output.
- May lead to retaliation by other countries> trade war
- Raises price for consumers> lesser choice> lower consumer utility
- Producers who import raw materials bear higher costs.
- Competition diminished: Domestic firms lose incentive to minimise cost>Reliant> inefficient> innovation reduced. Export competitiveness reduced.
Types of protectionism
Before protectionism: