8.

3 REASONS FOR PROTECTIONISM

8.3.1 Protection of Infant Industries
An infant industry is one that has a potential comparative advantage but is too young or
undeveloped to realise this potential, especially when the trend towards globalization gives locals
access to the goods of more established foreign competitors.
Infant industries face high start-up costs at their initial stage of production. Subsidies can be given
to these producers. These help to lower cost of production and as a result, prices of goods. Infant
industries will then be better able to compete with more efficient foreign producers. An infant
industry can be protected until it matures and is able to expand its output sufficiently to reap
economies of scale and establish greater market share. ence, protectionism may be necessary in
the short-run to level the playing field.
Liitation !1" Protection a# cause co$%acenc# and inefficienc#.
The local industry may become complacent and produce a limited variety of low-!uality goods at
high prices if protectionism is implemented as a long-term measure. "nder protectionism, the
industry lacks the incentive to mature into strong and efficient producers which can compete
internationally. #I.e. The industry may not grow as !uickly as it should, or firms in the industry may
end up as $permanent% infants due to stagnation&
Liitation !&" It is difficu%t to identif# infant industries.
There is no foolproof method for identifying genuine or potentially efficient infant industries. 'very
new industry may claim to be an (infant( but not every newly established industry is a genuine
infant industry. They must have a potential comparative advantage which can be nurtured into an
actual comparative advantage under temporary protection. )ometimes, the government winds up
protecting industries which fail to become mature industries with the ability to compete in the global
market.
8.3.& Protection a'ainst (u$in'
*umping refers to the selling of a good to a foreign country at a lower price than that charged to
domestic buyers. This price is often below the marginal cost of production.
The ob+ective is to drive out rival producers in the importing country and eventually monopolize the
market. Import-substituting industries in the receiving market may not be able to compete with such
foreign exporters and hence may not be able to develop.
Also, production is often subsidized by the government, leading to unfair competition with
producers in the importing countries. ,or example, the steel industry in ")A is highly subsidized,
creating unfair competition among other producers in the world.
ence, domestic producers of particular products often argue that they are unfairly victimized due
to the competing foreign imports $dumped% in domestic markets.
In the long run, this may result in the destruction of local import-substituting producers. The larger
concern is that once competitors are destroyed, the monopolist will charge a higher price to
consumers in the importing country, making these consumers worse off.
Thus, protectionism such as tariffs is often used to reduce imports and increase domestic
production.
Liitation" (u$in' cou%d si$%# be an indicator of 'reater efficienc# in forei'n firs.
)ometimes, domestic producers level accusations of (dumping( and unfair trading practices
against foreign producers when they cannot match the lower prices of their foreign rivals. )uch
accusations may not necessarily be true. ,oreign firms could be more efficient and thus able to
-undercut- domestic producers by selling similar products at lower or more competitive prices.
ence, when domestic producers cry $dumping%, we have good reason to suspect they are simply
campaigning for protectionist measures to shelter them from foreign competition. ,or instance, in
the face of mounting trade deficits with .hina in recent years, this argument has been used by the
")A to pressure .hina to cut back on its steel exports to ")A.
In those instances where foreigner producers are more efficient, the ultimate cost of protection is
borne by domestic consumers, e.g. American car consumers suffer welfare losses if their car-
manufacturers end up paying higher costs for using domestically produced steel.
In practice there are legal channels for (victims( of alleged dumping to lodge official complaints
through specially appointed courts or a world body like /T0. 1ut it is often very difficult to prove
(dumping( in practice as there is a fine line between discriminatory pricing and differential pricing.
8.3.3 Protection to i$ro)e Trade *a%ance + (oestic E$%o#ent
/hen import expenditure exceeds export revenue, there will be a balance of trade deficit. )ome
governments resort to trade barriers to reduce import expenditure. It is argued that protectionist
measures should be imposed in order to restrict imports, thereby improving the balance of trade.
".). may attempt to use protectionist measures to narrow her trade gap through the use of tariffs or
!uotas. This would have the effect of restricting the level of imports into ".). by making imported
goods more expensive ence, import expenditure falls, reducing her trade deficit. #"se tariff diagram
to explain in detail.&
/hen the trade balance improves, aggregate demand, which consists of .2I232#4 5 6&, will
increase and that will lead to a rise in national income via the multiplier effect. /hen production
increases, firms will experience a fall in stocks and inventories and will start hiring people. This will
provide +ob opportunities and reduce unemployment.
Liitation !1" Protectionis a# %ead to reta%iation fro ot,er countries.
owever, such protectionist measures will undoubtedly harm the trade position of her ma+or trading
partners as their exports to ") will fall. It is deemed to be a 7beggar-thy-neighbor8 approach. ence,
if they reta%iate with their own set of protectionist measures, ") exports will fall and offset any prior
improvement in her trade deficit. In fact, this will cause world trade to fall, impeding recovery and
growth if there is a worldwide recession.
Liitation !&" T,e effecti)eness of a tariff de$ends on t,e $rice e%asticit# of deand for
i$orts.
,urthermore, the effectiveness of a tariff depends on the $rice e%asticit# of deand for i$orts. If
there is a lack of domestic substitutes, the higher post-tariff price will lead to a less than proportionate
fall in !uantity demanded despite the higher post-tariff price, reducing the effectiveness of the tariff in
reducing import expenditure.
E)a%uation - (ead.ei',t %oss borne b# consuers.
In such instances, the ultimate cost of protection is borne by domestic consumers, e.g. American car
consumers suffer welfare losses if their car manufacturers pay higher costs for using domestically
produced steel. #9rices of cars will rise to reflect increased costs of production.&
.
/ith reference to the tariff diagram in ,igure :, since the price is higher after the tariff, consumers are
worse off, compared to having free trade as consumer surplus is reduced. The loss in consumer
surplus is e!ual to the areas A/*/C/(.
Though producers gain in terms of larger producer surplus of area A and government can collect tax
revenue of area ., there is still a deadweight loss, represented areas 12*.
,
Su''estion" Are there other ways to correct 109 dise!uilibrium;
Any persistent negative trade imbalance or deficit points to fundamental weaknesses in a country-s
ability to export. <esorting to protectionism addresses the symptoms rather than the root cause of
the problem. Ideally, a country should look at the root cause of problems and rectify them. ,or
instance, the root cause of trade imbalance might lie in the inability to compete in global markets
due to the loss of comparative advantage. To regain competitiveness the country may need to
restructure its export industry, re-train its workforce and move on to produce higher value-added
products for exports.
8.3.0 Protection of (ec%inin' or 1Sunset2 Industries
In some situations countries may temporarily protect industries which are no longer competitive in
order to prevent sudden massive structural unemployment in these industries. These are usually
industries which employ a substantial proportion of the workforce.
After a country decides to specialise and trade, workers in the contracting sunset industry #which
has lost its comparative advantage&, will become unemployed. The transitional period of
read+ustment and reallocation of resources within each country could be painful and costly.
/ith the trend towards globalization, massive structural unemployment can arise due to=
A faster rate of econoic transforation and tec,no%o'# transfer3 .,ic, resu%ts in ne.
ac,ines and et,ods t,at a4e o%d s4i%%s obso%ete
A 'reater f%o. of c,ea$er i$orts .,ic, co$ete direct%# .it, doestic $roducers. This
leads to a fall in demand for domestic goods. As import-substituting local firms lose their
comparative advantage and shut down, workers are retrenched. They may face difficulty seeking
employment in other sectors.
9rotectionist measures, such as tariffs, reduce imports and increase domestic production. This is a
buffer for workers in these sunset industries as it proves them with the opportunity to retrain and
seek employment in other expanding sectors of the economy.
*eclining industries can also make use of protectionism to reorganize and restructure themselves
in order to compete effectively with the foreign rivals.
Liitations"
In practice, imposing protective tariffs to allow -sunset- industries to fade out gradually may
delay the restructuring process, prolonging inefficient use of the economy-s resources.
Instead of allowing inefficient industries to be weeded out !uickly, protectionist measures
keep such -dying- industries alive on -artificial support-. .onversely, removing such
protectionist measures may hasten the restructuring process and allow the economy to
build up new vibrant sectors !uickly to sustain growth.
0nce introduced, protectionist measures may be difficult to remove due to resistance from
parties with vested interests. istorically, high protective tariffs and subsidies have allowed
inefficient 'uropean and >apanese farmers to survive.
Su''estion"
9ublic policy makers should recognise that changing trade patterns typically impose transition
costs on affected industries and workers. Thus, ad+ustment assistance #e.g. retraining ? skills
upgrading subsidies& should be given to them. <endering ad+ustment assistance to structurally
unemployed workers when a country specialises and trades in response to changing global
demand and comparative advantage is more preferable than imposing trade barriers. )ome of the
gains from increased trade can be used to compensate workers who suffer losses during these
periods of ad+ustment.
8.3.5 Ot,ers
6A7 Protection of Strate'ic Industries
There may be strong political and strategic reasons for protecting an industry in which a country
has no comparative advantage. )uch reasons include the need to be self-sufficient in times of war
and the desire not to be dependent on insecure or politically undesirable sources of the goods.
.ertain industries are indispensable to any war effort 5 steel, transportation e!uipment, aircraft,
mining of strategic minerals etc. 'ven though a nation may not have a comparative advantage in
the production of such products, they are necessary and it may be difficult or impossible to import
them when war disrupts world trade. In this case, protective tariffs and !uotas may be +ustified to
enable these industries to survive on domestic soil during peacetime. In short, defense
considerations override the usual economic arguments.
6*7 Protection A'ainst 1*ads2
0ften countries impose measures to prevent the import and consumption of harmful goods such as
narcotic drugs, pornography and firearms.
6C7 Protectionis to Ac,ie)e Po%itica% Ob8ecti)es
Trade is often used as a weapon of foreign policy to achieve political ob+ectives. 'mbargoes and
other import controls are often imposed on trade in armaments and military goods.
CONCL9SION:;9(<MENT
9rotectionism is valid if used under the right circumstances e.g. to discourage dumping to
encourage fairer trade and help infant industries to grow in the short run.
"ltimately, countries will embrace globalization only if they perceive free trade and free movement
of capital and labour to be fair and beneficia% #i.e. a win-win situation& for everyone.