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Arguments for & against

Trade Protection
Unit 13 - Lesson 7

Learning outcomes:
Discuss the arguments against trade protection, including a misallocation
of resources, the danger of retaliation and trade wars, the potential for
corruption, increased costs of production due to lack of competition, higher
prices for domestic consumers, increased costs of imported factors of
production and reduced export competitiveness.
Discuss the arguments in favour of trade protection, including the
protection of domestic jobs, national security, protection of infant
industries, the maintenance of health, safety and environmental
standards, anti- dumping and unfair competition, a means of overcoming a
balance of payments deficit and a source of government revenue.

Summary of the impacts to stakeholders:

Tragakes, page 376

Arguments against Trade Protection


Domestic producers and workers (in the industry benefiting from trade
protection) are the only people in the country better off from the trade
barrier.
The gain the producer receives results in higher cost of production
and a reduction in productive efficiency.
Consumer lose:
Higher prices
Reduction in the amount of goods demanded
Only exception is subsidies where the price does not increase nor
does the quantity demanded change

Arguments against Trade Protection


Income distribution worsens: those with lower incomes are affected the
most due to the increase in prices.
Subsidy is the only trade barrier that does not result in a worsening of
income distribution.
Foreign producers are worse off in all cases due to the restriction/barrier to
trade.
Society as a whole is worse off due to a global misallocation of resources.
Trade protection may have a negative effect on the exports of the country
due to other countries not trading with you due to the existing barriers.
Trade protection creates the possibility for corruption: ex: Tanzania TRA

Arguments for Trade Protection - Qualified


Infant Industry: an industry that is
new that has not had time to
achieve economies of scale and
compete on the global market.
Government can choose to offer
trade protection to those firms in
order to allow them to grow
sufficiently so they can compete in
the global marketplace.
http://www.romeconomics.com/wpcontent/uploads/2014/02/Infant-Industry.png

Arguments for Trade Protection


Strategic Trade Policy:
Protection of high technology industries to help them achieve economies of
scale and create a comparative advantage. It is argued that certain industries,
such as computers, telecommunications and semiconductors, are very
important to the future growth of an economy, and must therefore receive
protection until they grow to a size large enough to achieve the necessary
economies of scale. (TRAGAKES, PG. 377)
Issues:

Difficulty in identifying those industries that need protection


Choosing appropriate policies.
Government may protect industries after they have achieved economies of scale.

Arguments for Trade Protection - Qualified


National Security: Certain industries are essential for
national defence and should be protected by the
government.
Examples: aircrafts, weapons, warships.
Countries do not want to rely on other countries especially
those with shaky relationships for production of their
defence materials.
Issues:

Other industries not directly involved in the production


of goods/services deemed necessary for National
Defence may get protection. Example - steel industry

http://www.canada.
com/cms/binary/8821872.jpg

Arguments for Trade Protection - Qualified


Health, Safety & Environmental:
Some countries may restrict the import of
certain goods/services if they are
deemed by the importing country not to
qualify under the health, safety and
environmental regulations of that
country.
Example: Genetically Modified Foods
and seeds are banned in many
countries.

Tragakes, Page 378

Arguments for Trade Protection - Qualified


Diversifying a countrys economy:
Opposite of Specialization. Countries that are dependent on one industry
are more at risk of shocks to their economy especially if the good/service
they produce falls in price.
Example: many countries dependent on commodities as their main
industry are experiencing slowing economic growth due to the decrease in
commodity prices.
Diversifying their economy would benefit and allow them not to feel the
swings in economic growth.

Arguments for Trade Protection - Questionable


Tariffs as a source of Government Revenue:
In Developing Countries, tariffs account for a
large proportion of the countrys revenue.
Issues:

Regressive Tax hurting those with lower


incomes more than the wealthier.
Should only be a temporary measure, but
often it is not.
Negative impact on income distribution.

http://www.foodsafetynews.
com/files/2013/03/importship_406.jpg

Arguments for Trade Protection - Questionable


Overcoming Balance of Payment Deficit:

Occurs when the inflow if money into a country


is less than the outflow creating a deficit.
Placing trade barriers on imported goods would
limit the amount of goods coming into the
country essentially limiting the amount of
money leaking out of the economy.

Issues:
Decrease in Imports may come at the expense of a
decrease in the number of exports thus negating
the positive effect.

http://www.sundaytimes.
lk/100613/images/eco-cartoon.jpg

Arguments for Trade Protection - Questionable


Anti-dumping Argument:
Dumping: the sale of goods on the market at a
price below the world price. Usually occurs when
a country provides export subsidies.
If a country suspects a trading partner of dumping
goods into their market, the country should be
able to place trade restrictions on the dumping
country.
Issue:

Very difficult to prove dumping


Responsibility of WTO

http://europe.chinadaily.com.
cn/epaper/images/attachement/jpg/site241/
20121207/0013729e4771122b8c163b.jpg

Arguments for Trade Protection - Questionable


Protecting Domestic Jobs:
Though it may increase employment in the sector receiving trade protection, it
results in the global misallocation of resources.
Domestic society becomes worse off due to the increase in prices and decrease in
the quantity on the market.