4.3.1 Arguments For Trade Protection Notes

1. Trade Protection leads to positive and negative impacts for economies, with welfare loss being always present due to inefficiencies.
2. Yet, governments still fight for protection.
3. It is important to note that not all arguments are positively looked at by economists.
4. Under non-economic or long-term considerations, some arguments are justifiable while others seem questionable.

Justifiable Arguments

Infant Industry

These infant industries may struggle to compete with established global firms that are more efficient, have less costs and incur the benefits of economies of scale. Therefore:

1. Shielding these emerging industries from international competition initially allows them to grow and become competitive.
2. Hence, they can be protected up until their costs are not comparatively high to foreign producers where they are ready to compete and will not get disincentivised by foreign producers.

This argument is strong on the basis that countries may have a comparative advantage on an industrial good but cannot compete initially without initial establishment and protection.

However, issues arise with this argument as:

1. It's difficult for governments to predict which industries will achieve relatively lower costs in the future.
2. Firms that receive protection may become inefficient and reliant without an incentive to grow.
3. Governments may still continue protecting firms even after maturity.

National Security

Some industries, especially in defence, are vital for national security as:

1. Protecting these sectors ensures that a country remains self-sufficient in times of crisis, avoiding dependency on potentially unreliable foreign suppliers.
2. Further, having an unfriendly nation specialise in such goods and services may have negative potential effects when in crisis.

This argument is also considered to be reasonable however:

1. Some industries that are indirectly related or have small connections with defence industries try to receive protection.
2. This leads to lack of competition in those respective industries and could lead to inefficiencies as well.

Health and Safety Standards

Trade restrictions help maintain strict health, and safety standards, ensuring substandard foreign products do not endanger citizens or the environment.

However, this argument can be used as a hidden barrier to reduce competition for foreign producers and create bureaucratic delays (see 4.2.4 Administrative Barriers).

Environmental Standards

Similarly, imposing restrictions to maintain environmental standards could be crucial for countries, particularly those focused on sustainability.

1. As the current world is shifting towards more sustainable growth, environmental protection could be a valid protection imposed
2. However, this means countries could take advantage of these standards easily.

Economic Diversification for Developing Countries

Free Trade (alongside comparative advantage) encourages a country to specialise its production into one or a fewer range of goods and services

1. Developing countries usually specialise in very few primary commodities.
2. Hence, they struggle to grow and develop other sectors with trade.
3. Further, they face many issues from over-reliance.

Trade protection can help diversify the economies of developing nations (ELDCs), reducing reliance on a narrow set of exports and fostering more stable, long-term growth.

However, a risk that could appear is that governments might not know which goods are most effective to protect for further diversification.

Questionable Arguments

Anti-Dumping

Dumping creates unfair advantages (usually paired with 4.2.3 Export Subsidies) and is illegal by international agreements.

• Governments that suspect foreign countries of dumping, impose tariffs to prevent unfair competition, as it could otherwise harm and cripple domestic industries.

However, anti-dumping is questionable as dumping itself is difficult to prove and it could be used to offer protection to domestic industries even when the case is not viable.

Unfair Competition

Countries may engage in many forms of unfair advantages:

1. Dumping (explained above)
2. Export subsidies (4.2.3 Export Subsidies)
3. Administrative barriers as hidden protection (4.2.4 Administrative Barriers)
4. Artificially low exchange rates (4.5 Exchange Rates)
5. Obtaining intellectual property illegally

Therefore:

• Protecting local businesses from unfair advantages helps promote fair competition and prevent market distortions.

However:

• This concept is difficult and time-consuming to prove.
• Therefore, countries use these arguments for other hidden reasons and take advantage.

Balance of Payments Correction

A balance of payment deficit occurs when money outflow is larger than money inflow for a country, usually due to more imports than exports (4.6 Balance of Payments).

1. By limiting imports, countries can reduce trade deficits and stabilise their economies, helping to correct imbalances in international payments.
2. However restrictions on imports will come at a cost of falling exports from and retaliation from other countries.

Hence, in the long-term this solution for economies does not hold strongly.

Government Revenue

1. Tariffs and duties provide governments with a source of income.
2. This is especially true in countries with underdeveloped tax systems, as it supports public finances and infrastructure.
3. However, they are regressive, worsen income distribution (4.2.1 Tariffs) and can be act as an excuse for governments to delay the change of their tax systems.

Job Protection

By limiting foreign competition, trade protection can help preserve domestic jobs, especially in industries vulnerable to being undercut by cheaper imports.

1. However, if restrictions are imposed on goods and services used as inputs within industries in a country, this could raise the costs of production and backfire as it could worsen employment.
2. Further, improving employment in a country by imposing barriers could worsen employment for other countries and cause them to retaliate.