protectionism

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Protectionism

Notion that governments should protect domestic industry from import competition by means of tariffs, quotas, and other trade barriers.

Protectionism

Any government policy or regulation that restricts international trade. Examples include import quotas, which set a maximum number of imports for a certain good over a given period of time, and import substitution, in which the state subsidizes businesses and industries to make domestic goods less expensive. By far the most common example, however, is the tariff, which is a tax on imports. Proponents of protectionism argue that it encourages domestic production of goods and helps working class people, while critics contend that it hurts the people it aims to help by discouraging competition, which may drive down prices. The balance of protectionism and free trade is a controversial topic regarding the government's role in international trade. See also: General Agreement on Tariffs and Trade.

protectionism

The establishment of barriers to the importation of goods and services from foreign countries in order to protect domestic producers. Protectionism generates higher consumer prices. It is also likely to penalize domestic exporters because foreign countries are apt to retaliate with trade barriers of their own.

protectionism

the measures taken by a country to protect certain of its domestic industries from foreign competition and, on occasion, to assist the country's balance of payments. See TARIFF, QUOTA, DUMPING, LOCAL CONTENT RULES, SUBSIDIES, FREE TRADE, WORLD TRADE ORGANIZATION.

protectionism

a deliberate policy on the part of governments to erect trade barriers such as TARIFFS and QUOTAS in order to protect domestic industries from foreign competition.

While there are arguments for protection, especially appealing to sectional interests, protectionism cannot, for the most part, be vindicated as being in the best interests of the national and international community. Take, for example, the often cited contention that tariffs are needed to equalize wage rates between countries. The UK and US textile industries complain that their domestic positions are undermined by foreign suppliers who employ ‘cheap labour’. It should be noted, however, that for the economy as a whole, high wage rates are the result, not the cause, of productive efficiency - other industries successfully meet foreign competition in both domestic and foreign markets despite higher wages. This is because they rank higher in the order of COMPARATIVE ADVANTAGE. Protection of industries that come low in the order of comparative advantage distorts the industrial ranking and leads to inefficient resource utilization. Foreign competition would force contraction of the textile industries, and the resources released from it could then be devoted to products in which the country has a comparative advantage.

Protection might be necessary, it is suggested, in the short term to facilitate an orderly restructuring of industries (particularly where manpower resources are highly localized), but there is the danger that such protection might become permanent in the face of vested interests.

Other arguments for protection, while superficially appealing, can usually be achieved more effectively by alternative means. Thus, selective tariffs and quotas may assist in restoring BALANCE-OF-PAYMENTS EQUILIBRIUM but distort the ordering of industries by comparative advantage. By contrast, aggregate fiscal and monetary policies and exchange-rate adjustments affect all foreign transactions.

There are, however, some seemingly respectable arguments for protection. From the viewpoint of the welfare of the world as a whole, the most popular claim made for tariffs, etc., is the so-called INFANT-INDUSTRY argument. Protection can be an effective means of stimulating the development of an industry that is well suited to a country (in terms of potential comparative advantage) but that finds it impossible to get started unless it is protected from imports. Over time, suitably protected, such an industry is able to acquire internal economies of scale (i.e. lower costs through exploiting a larger domestic market) and to take advantage of various external economies (a well-trained labour force or the ‘learning-by-doing’ effect). Eventually the new industry is able to become equally or more efficient than its older competitors. The tariff can then be removed, leaving behind a viable and competitive industry.

Such temporary protection of industries does not conflict with the goal of free traders: maximum specialization on the basis of comparative advantage. It is only through the temporary equalization of competitive conditions that the industry is able to reach that stage of development that allows it to fully realize its potential.

There are problems, however. Industries are frequently selected for protection not on the basis of a favourable comparative advantage but for nationalistic reasons (e.g. diversification of the economy); ‘infant industry’ becomes a slogan to justify promiscuous protection without regard to merit. The protection afforded may be over-excessive and continue for longer than is strictly necessary.

In some circumstance, tariffs can be employed to improve a country's TERMS OF TRADE by forcing down prices in exporting countries. This applies especially to major importers who are large enough to exercise buying power. It is to be noted, however, that the gain from lower-priced imports may be offset by two adverse effects of tariffs: their diversion of resources to less productive uses and the fact that trade partners are likely to retaliate by imposing tariffs of their own. See also IMPORT RESTRICTIONS, NOMINAL RATE OF PROTECTION, EFFECTIVE RATE OF PROTECTION, BEGGAR-MY-NEIGHBOUR POLICY, MULTI-FIBRE ARRANGEMENT, DUMPING, LOCAL CONTENT RULE, WORLD TRADE ORGANIZATION.

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