25. Protectionism

Question 1

What is Protectionism?

Answer 1

Protectionism represents any attempt to impose restrictions on trade in goods and services. In this context it is countries opting to impose restrictions of foreign imports.

Question 2

What are the main methods of Protectionism?

Answer 2

Tariffs:
a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply

Quotas:
these are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period

Intellectual property laws:
e.g. patents and copyright protection

Question 3

What are the arguments for Protectionism?

Answer 3

Fledging industry argument:
Certain industries possess a possible comparative advantage but have not yet exploited economies of scale. Short-term protection allows the ‘infant industry’ to develop its comparative advantage.

Externalities and market failure:
Protectionism can also be used to internalise the social costs of de-merit goods. Or to correct for environmental market failure in the supply of certain imports.

Protection of jobs and improvement in the balance of payments

Question 4

What are the Arguments against Protectionism?

Answer 4

Market distortion: Protection can be ineffective and costly. It leads to higher prices for consumers as tariffs push up prices and insulate inefficient sectors from competition, penalising foreign producers i.e. allocative inefficiency. Also leads to productive inefficiency- firms that are protected from competition have little incentive to reduce production costs, leading to X-inefficiency and higher AC

Reduced market access for producers:
Export subsidies depress world prices- damage output, investment and jobs in developing countries that rely on exports.

Loss of economic welfare:
Tariffs create deadweight loss of consumer and producer surplus. Welfare lost through higher prices and less consumer choice.