Kabir's Econ Blog

October 3, 2009

For and Against Protectionism

Filed under: Uncategorized — kabir1892 @ 7:41 am

2009-02-03 slowing world protectionism tortoise 600

There are six reasons why governments should still protect trade. First of all, they want to safegaurd domestic employment. As policies lower imports, aggregate demand will increase, and will therefore increase the level of output and employment domestically.

The second reason why protectionism is a good idea is because they want balanced payments. Competition will rise as imports will drop causing exports to increase which will then cause domestic output to increase.

The third reason is to prevent labor exploitation specifically in developing economies. The goal of this is to make imports reflect the true costs of production. This might also reduce the imports from some poor countries. 

The fourth reason why protectionism can be good because it can prevent dumping. This is where economies export goods at a price that is below the cost of production. This means that the domestic consumers are paying more than the countries that are buying it overseas.

The fifth reason is to safegaurd infant industries. Countries can enter new markets as comparative advantages arise. The industries need protection from competitors.

The final reason is to be able to make a developing country more diverse. A lot of developing countries rely on exports of primary commodities. This can cause the  countries to become more familiar to changes in commodity prices. To diversify and create new export revenue, they have to protect the industries from being familiar with international competition for a while.

Even though this may be true, there are several reason why protectionism is not a good thing. One reason though is because of the inefficiency of resource allocations. Tariffs or other protections are not the best solutions. This is because firms can remain inefficient. They don’t always have the incentive of reducing prices and compete globally if they think that tariffs will go on. This is also true with infant industries, where they are protected. If tariffs lasts for a long term then the infant industry can never develop. Firms that work with high costs can be unable to achieve competition with exports. Overall, resources will not be used in the most efficient way.

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