4.2 Protectionism Flashcards
1) Why do developing countries impose protectionism?
Developing countries impose protectionism to allow small industries time to grow and benefit from economies of scale, reducing costs of production and competing with established industries abroad before removing protectionism. This is done to overcome the risk of primary commodity over-specialization and the resource curse, as small industries may not have the economies of scale to compete with large industries in developed countries.
Evaluation: Why may imposing protectionism for this reason fail in the medium to long term?
Imposing protectionism for this reason may fail in the medium to long term due to complacency and a protectionist dependency. The protectionism measures may prevent costs of production from decreasing enough to become competitive. As a result, the small industries may not be able to sustain themselves once the protectionism is lifted, leading to inefficiencies and a lack of competitiveness.
Evaluation: Why may developing countries struggle to impose protectionism on developed countries without risking retaliatory protectionism?
Whether developing countries have the international power to enact such protectionist measures on developed countries without risking retaliatory protectionism is a big assumption. The reality of this taking place without damaging repercussions is unlikely. Developed countries may respond by imposing their own protectionist measures, which can lead to trade wars and harm international relations in the long term. Thus, the assumption that developing countries can impose protectionism without risking retaliation may not hold true.
2) Why is protectionism imposed to protect against dumping?
Protectionism is imposed to protect against dumping, which refers to the sale of a product in overseas markets at a price below the cost of production. Dumping often occurs due to heavy subsidies or minimum price schemes, resulting in an excess supply of the product. Protectionism is used when countries believe that products from abroad are being dumped in their markets. Dumped products are artificially more competitive than domestic products, leading to the decline of domestic industries, structural unemployment, and public discontent.
Evaluation: Why is proving dumping difficult?
Proving dumping is difficult because finding information regarding costs of production and proving that products have been intentionally sold below cost is a challenge for the World Trade Organization (WTO), which governs global trade. It is hard to determine whether the lower price is due to genuine cost advantages or intentional selling below cost. The complexity of gathering evidence and proving the intent behind pricing makes it challenging to effectively address dumping cases through protectionist measures. This difficulty can lead to misunderstandings and trade disputes between countries.
Evaluation: Why might trade talks through the WTO be a better option to resolve dumping disputes?
Engaging in a trade war through protectionist measures may harm international relations in the long term. Instead, trade talks through the WTO can be a better option to resolve dumping disputes diplomatically. Through negotiations and discussions, countries can work towards finding mutually acceptable solutions that address the concerns of both parties involved. This approach helps prevent retaliatory protectionism and promotes a more cooperative and stable global trade environment. Resolving disputes through dialogue and cooperation benefits all parties involved by reducing trade tensions and preserving the integrity of international trade.
3) How does protectionism help protect against unemployment?
Protectionism helps protect against unemployment by preventing de-industrialization and structural unemployment. When a country loses its comparative advantage, industries may decline, leading to workers losing their jobs. By using protectionist measures, the government can maintain incomes and living standards for those workers who would have otherwise lost their jobs. It also reduces the financial burden on the government, which would otherwise need to retrain these workers to make them occupationally mobile.
Evaluation: Why might protectionism only delay the inevitable decline of an industry?
If an industry is already in decline, protectionism can only delay the inevitable. The costs of protectionism may outweigh the benefits, as it postpones the necessary adjustments in the economy. Allowing workers to become more occupationally mobile and transition into other sectors may be a more efficient long-term solution. Despite the negative externalities and individual costs of unemployment, it is argued that intervention through protectionism may not be the most effective approach if the loss of competitiveness is primarily due to factors such as dumping from abroad. The government needs to carefully consider the overall costs and benefits before deciding on protectionist measures.
4) Why do governments impose product safety or environmental standards on imported goods?
Governments impose product safety or environmental standards on imported goods to protect domestic consumers and ensure that the standards of imported products match those of domestic products. This measure aims to prevent the entry of potentially unsafe or environmentally harmful products into the country. As long as the protectionism is not discriminatory, the World Trade Organization (WTO) allows this practice, and it does not violate any of their rules.
Evaluation 2: How might tougher standards for developing countries exporting primary commodities impact their comparative advantage and development progress?
For developing countries exporting primary commodities to developed countries, meeting the tougher product standards can increase costs of production and potentially erode their comparative advantage. Meeting these standards may require additional expenses, such as purchasing extra fertilizer to meet agricultural standards or investing in machinery and laboratories for testing. The high costs and difficulties in meeting these standards can harm the livelihood and standard of living of farmers in developing countries, impeding their development progress. This disparity in standards and associated costs can create barriers for developing countries in international trade, limiting their ability to compete effectively.
5) Why might a government impose protectionism to compete with low-cost labor abroad?
Where imports are coming in from a country with low cost labor advantages. A government may impose protectionism to compete with low-cost labor abroad. They argue that protecting domestic workers through minimum wage laws and strong worker rights is important, even if it increases costs of production for firms. The government views this as a means to ensure fair competition with countries that do not provide similar protections to their workers.
Evaluation: How does using protectionism for this reason affect the world allocation of resources?
Using protectionism for this reason promotes inefficient domestic production, worsening the world allocation of resources. Protectionism diverts resources towards less efficient domestic producers, which misallocates resources compared to more efficient foreign producers. This distortion of comparative advantage leads to allocative inefficiency and a less optimal allocation of resources globally. Consumers bear the cost of protectionism through higher prices, resulting in a loss of consumer surplus. Therefore, using protectionism to compete with low-cost labor abroad has negative consequences for resource allocation and overall welfare.
6) How can protectionism be used to eliminate a current account deficit and promote economic growth?
Protectionist policies can eliminate a current account deficit and promote economic growth by either increasing the price of imported goods or blocking imports altogether. This reduction in expenditure on imports improves the trade balance of the current account, leading to a decrease in the deficit. As net exports increase (with improvements in the current account position), the aggregate demand equation (AD) will also increase, contributing to actual economic growth.
Evaluation: What is the major problem with using protectionism to close a trade deficit?
The major problem with using protectionism to close a trade deficit is the likelihood of retaliation from trading partners. Countries may respond unfavorably to protectionist measures imposed on them due to a trade deficit in another country. Retaliation can take the form of imposing stronger protectionist measures on the initial country’s exports, leading to a significant reduction in export revenue. In the long term, this retaliation worsens the trade deficit, creating a tit-for-tat cycle of punitive actions that benefits no one. Protectionism, therefore, can be seen as a zero-sum game with detrimental consequences for all parties involved.
7) Why do developing countries impose tariffs to raise government revenue?
Developing countries often face challenges in raising and collecting tax revenue, making tariffs a more accessible source of income. Tariffs are easier to collect, and their implementation can substantially increase tax revenue for developing countries. This additional revenue allows governments to allocate funds to crucial areas such as education, healthcare, and infrastructure, promoting overall development.
