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Protectionism
is the theory or practice of shielding a country’s domestic industries from
foreign competition through policies such as taxing imports through tariffs,
establishing quotas and through Export Subsidy restraints. When a protectionist
government is in power, they are more inward looking, towards the demands and
needs of their citizens and how those issues can be solved by stimulating
domestic supply. Protectionism represents any attempt by a government to impose
restrictions on trade of goods and services between countries. Protectionist
governments dislike free trade agreements such as NAFTA and the EU, instead
seeking to plug the gap between domestic demand and domestic supply not with
foreign supply but instead with increased domestic supply.

Arguments in
favour of protectionism cite the presence of fledgling industries within one’s
own economy and the duty to protect them. The argument follows that these companies,
especially in the cases of countries such as the USA, possess potential
comparative advantage but have yet to take advantage of the economies of scale.
Therefore, certain policies are needed to protect these companies from foreign
competition until they have achieved economies of scale and can be competitive
on a world stage. The problem with this argument is that often, protectionist
policies stay in place once an industry has become competitive and reduces the
efficiency of the country, not allowing it to produce on the PPF. There is also
not much evidence to support the claim that short term protectionist policies
will help make fledgling industries or companies competitive as it often takes
greater than 20 years for new entrants into certain markets to establish
themselves.

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Another
argument to justify protectionism is that it is an anti-dumping technique.
Dumping is a type of predatory pricing where one nation, during a trade dispute,
may sell goods at a loss in order to gain more international acknowledgement
over another country. However, even though evidence of dumping is hard to find,
many developing countries have complained about the effects of dumping caused
by subsidies offered to producers by the EU which reduce the cost for suppliers
and allows them to offload any surplus onto the overseas markets which can have
a damaging effect on prices, demand and profits for the domestic producers for
developing countries. Anti-dumping methods allow countries to act against
dumped imports. For example, Bombardier, a French-Canadian aircraft
manufacturer, was selling their latest C100 jets to Delta Airlines below
production cost in order to accrue more orders for the aircraft. The US Dept.
of Trade then imposed a 100+% import tariff on the aircraft in order to allow
Boeing, an American aircraft manufacturer, to be able to compete with the
prices being offered by Bombardier.

 

Moreover,
protectionism can be a useful political tool. By stimulating domestic
production, protectionism theoretically create jobs which are a hot button
issue such as the issue surrounding jobs in the coal and rust belts in the USA.
Protectionism can also aim to combat inequality within countries, take account
of negative externalities and deal with de-merit goods such as alcohol and
drugs, which when used, have undesirable social effects. Protectionism can try
and teal with these problems through high tariffs barriers on certain goods or
at the extreme end, blockades of importation of certain products. Furthermore,
countries may favour protectionism in order to avoid having to specialise
solely in goods in which they possess a comparative advantage. This is because
if a nation focuses too heavily on one industry, if it goes into structural
decline, there may be a large spike in unemployment as new competition emerges,
leading to a negative multiplier effect, hence the phrase, diversification
lowers risk.

In spite of
these reasons, protectionism may not always be a favourable policy to adopt for
a country. Firstly, it will impact the consumers as it can serve as a tax
on domestic consumers, for instance in the case of the EU the nature of
existing protection means the heaviest taxes tend to fall on the necessities,
clothing and footwear. This can mean that the inequalities in distribution can
worsen due to regressive taxation.  Trade
barriers in the form of tariffs cause this and insulate inefficient sectors
from competition. They often penalise foreign producers and encourage
inefficient allocation of resources both domestically and globally. In general
terms, imports controls impose costs on society that would not exist if there was
completely free trade in goods and services. It has been estimated, for
example, that the recent tariff and other barriers placed on imports of steel
into the US increased the price of every car produced there by an average of
$100. Furthermore, this can lead to a reduction in market access for producers;
export subsidies depress world prices making them more volatile while depriving
inefficient farmers access to world market which is a major criticism of the EU
CAP. In 2002 the EU sugar regime lowered the value of Brazil, Thailand and
South Africa’s sugar exports by over $700 million, countries where a nearly
combined 70 million people live on 2 dollars a day or less

One of the other justifications for protectionist policies
is that they help to protect the relatively low paid and low skilled jobs in
industries that are becoming increasingly more competitive internationally.
Evidence suggests that, in the long term, tariffs are costly and an ineffective
way of protecting such jobs. According to DTI study on trade published in 2004,
since 1997 UK employment in textiles manufacturing has fallen by 45%, in
clothing manufacture by 60% and in footwear by half- despite the protection
afforded to EU textile manufacturers. The cost of protecting each job runs into
hundreds of thousands of Euros, so there is a significant opportunity cost
involved in imposing tariffs.

There is a danger that once a country imposes import
controls this will lead to retaliatory action by another leading to decrease in
the volume of world trade which in turn pushes up the cost of importing new
technology which will have a downward spiral effect on world trade and income.
An example of this is the “Beggar my neighbour” policies in the 1920s and 1930s
which saw an 8% fall in world trade volumes due to the restrictive trade policy
caused by American protectionism. 
Moreover, if one country imposes restrictions on another, the resultant
decrease in total trade will have a negative multiplier effect affecting many
more countries because exports are an injection on demand into the global
circular flow of income. The effect is more pronounced when trade disputes boil
over and lead to retaliation.

Lastly, there is reason to believe economic nationalism is a
cause for protectionism by a means of protecting a country’s domestic economy
i.e. consumption, jobs and investment, even if this requires imposition of
tariffs and other restrictions on the movement of labour, goods and capital.
Economic nationalism may include such doctrines as protectionism and import
substitution. Examples of economic nationalism include China’s controlled
exchange of the yuan, and the US’s use of tariffs to protect domestic steel
production. The term gained a more specific meaning in 2005 and 2006 after
several European governments intervened to prevent takeover of domestic firms
by foreign companies, and in some cases, the national governments also endorsed
counter bids from compatriot companies to create “national champions”. Such
cases included the proposed takeover of Arcelor (Luxembourg) by Mittel Steel
(India) and the French government listing of the food and drinks business
Danone (France) as a strategic industry to pre-empt a potential takeover bid by
PepsiCo (USA).

In conclusion, the use of protectionism can
depend on the data, in some cases the government may have imperfect knowledge
and so may protect the wrong industry for a long period of time. The more
developed countries use of protectionism will impact the less developed
countries as they will be able to access to the global market preventing
further development and even if all the data seems to be suggesting that
protectionist policies will pay off, it quite often is the case that either it
takes a lot longer for the policies to work their way through, or once worked through,
they don’t get removed and then begin to affect the economy negatively.

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