global economy 4.3- arguments for and against trade control/protectionism Flashcards
state the 9 reasons for trade protection/the advantages of trade protection
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- protecting domestic employment
- protecting the economy from low-cost labour
- protecting an infant (sunrise) industry
- to avoid the risks of over-specialisation
- strategic reasons
- prevent dumping
- protect product standards
- to raise government revenue
- to correct balance of payments deficit
- protecting domestic employment
in an economy there will be some industries that are in decline (sunset industries) because they cannot compete with foreign competition. If the industries are relatively large, this will lead to high levels of structural employment.
- protecting the economy from low-cost labour
it is often argued that the main reason for declining domestic industries is the low cost of labour in exporting countries and that the economy should be protected from imports that are produced in countries where the cost of labour is very low.
- protecting an infant (sunrise) industry
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.
so it needs to be protected against imports until it achieves a size where it is able to compete on equal footing.
- to avoid the risks of over-specialisation
governments may want to limit over-specialisation 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 economy.
- strategic reasons
certain industries need to be protected in case they are needed at times of war- eg agriculture, steel (defence items like planes and tanks), and power generation.
- prevent dumping
dumping is the selling by a country of large quantities of a commodity, at a price lower than its production cost, in another country.
this may ruin the domestic producers in the other country
where countries can prove that their industries have been severely damaged by dumping, their governments are allowed to impose anti-dumping measures
- protect product standards
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 standard of domestic products
WTO allows countries to impose such bans as long as they are based on scientific evidence
- to raise government revenue
in many developing countries it is difficult to collect taxes and so governments impose import taxes on products in order to raise revenue
- to correct balance of payments deficit
this could be an attempt to reduce import expenditure and thus improve a current account deficit when the country is spending more on its imports than it is earning for its exports.
this will only work in the short run:
- does not rectify actual causes of CAD
- other countries may retaliate
give reasons why protectionism may be detrimental for an economy
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- may raise prices to consumers and producers of the imports they buy
- less choice for consumers
- competition would diminish if foreign firms are kept out of a country, and so domestic firms may become inefficient without the incentive to minimise costs. innovation and export competitiveness may reduce
- distorts comparative advantage, leading to inefficient use of world’s resources. specialisation is reduced, reducing potential level of world’s output
- may cause retaliation by other countries, with the potential for a trade war with escalating tariffs
- may therefore hinder economic growth