Economics summative Flashcards
To protect national security
Governments often erect trade barriers to ensure that in case of a conflict a country is self-sufficient in the production of crucial goods for strategic reasons. The weapons and aerospace industries as well as the food industry are often classified as being of such strategic importance. However, the validity of this argument is doubtful, at least for countries belonging in wide strategic and/or political alliances, and whether or not a good is essential for national defense
To protect product standards
Trade barriers also exist to ensure that certain minimum safety and health standards are met. A country might wish to impose safety, health or environmental standards on goods being imported into its domestic market in order to ensure that the imports match the standards of domestic products. For example, the EU banned the importing of US beef in the 1980s because it was treated with hormones. However, there is a concern that these standards may sometimes be used as a form of ‘hidden’ protection to keep certain goods out if they are competing with domestically produced goods, such as administrative barriers.
To protect domestic employment
A most common argument in favor of restricting trade is to protect domestic jobs. Many claim that free trade decreases employment as cheaper and higher quality foreign products flood the domestic market, forcing domestic firms to shut down. If the industries that are shutting down are relatively large, this will lead to high levels of structural unemployment. Governments often attempt to protect the industries in order to avoid this unemployment. However, this argument is questionable since import restrictions apply to goods that are used as inputs in the production of other goods, it is likely that there will be higher costs of production due to the higher prices of the imported inputs, lower quantity of production in these industries, and therefore increase unemployment. It is even possible for the negative employment effects in the broader economy to be greater than the positive employment effects in the protected industry.
To correct a balance of payments deficit
Another common argument in favor of protection is to improve a trade deficit. A trade deficit exists if the value of imports of goods and services is greater than export revenues. The idea is that protection will render imports more expensive and less attractive. Spending on imports will then decrease, shrinking and correcting the trade imbalance. However, this argument is questionable: Firstly, it can lead to retaliation from trading partners, thereby reducing the country’s ability to export. Secondly, restricting foreign products reduces foreign incomes, affecting their ability to purchase the country’s exports. In such cases, protectionism may not be helpful and could even be harmful.
To protect developing industries
Another common argument in favor of protection is to assist the growth of certain industries in their initial stages of development. Many governments argue that an industry that is just developing may not have the economies of scale that larger industries in other countries may enjoy. The domestic industry will not be competitive against foreign imports until it can gain the cost advantages of economies of scale. Because of this, it is argued that the industry needs to be protected against imports until it achieves a size where it is able to compete on an equal footing. At that point, theory dictates, protection should be removed. However, this argument is questionable as it may be difficult for governments to know which particular industries have the potential to become low cost producers. Another argument is that once the selection of an industry is made, industries protected from competition may not have a strong incentive to become efficient. A third is that governments may continue to protect an industry even long after it has matured.
To prevent dumping
Another common argument in favor of protection is the anti-dumping argument. Dumping is the selling by a country of large quantities of a commodity, at a price lower than its production cost, in another country. For example, the EU may have a surplus of butter and sell this at a very low cost to a small developing economy. This may ruin the domestic producers in the developing country. Where countries can prove that their industries have been severely damaged by dumping, their governments are allowed, under international trade rules, to impose anti-dumping measures to reduce the damage. However, this argument is questionable due to the difficulties involved in proving that dumping is being practiced, many governments often use it as an excuse to offer protection to their domestic producers when this protection is not necessary or justifiable.
To raise government revenue
Another common argument in favor of protection is that developing countries rely on tariffs to provide a government with revenues. In many developing countries, it is difficult to collect taxes and so governments impose import taxes (tariffs) on products in order to raise revenue. This is not so much an argument for protectionism, but more a means of raising government revenue. However, this argument is questionable due to tariffs having disadvantages, as they are a regressive type of tax, and so have negative impacts on income distribution; in addition, they have negative effects on allocative efficiency.
To avoid the risk of over-specialization
Another common argument in favor of protection is to avoid over-specialization. Governments may want to limit over-specialization if it means that the country could become over-dependent on the export sales of one or two products. Any change in the world markets for these products might have serious consequences for the country’s economy. For example, changes in technology could severely reduce the demand for a commodity, as the development of quartz crystal watches did for the Swiss wristwatch industry, harming the economy. The introduction of new products or changes in the patterns of demand and supply can have serious effects on the economies of developing countries, which tend to over-specialize in the production of primary products, without choice. For example, the invention of synthetic rubber had a large negative effect on the rubber industry in Malaysia. However, this argument is questionable since there may be a risk that governments may not know which products or industries are the most appropriate to select for protection that will allow for successful diversification.
