Arguments in favour of protection
Infant industry argument
Infant industry: a new domestic industry that has not yet established itself to compete with more ‘mature’ foreign rivals.
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Infant firms have a higher unit cost than existing firms (since they gain fewer economies of scale), thus they are higher up on the LRAS curve. Thus, an infant industry might struggle to compete with a mature industry.
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If an infant industry is protected from foreign competitors,competition then it will be able to grow, gain economies of scale, and be able to compete with foreign rivals.
Evaluation
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It’s difficult for the government to identify which industries have the potential to grow and compete in global markets.
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Protection can disincentivise infant industries to operate efficiently (since they are provided with production subsidies already) which disables them to compete internationally.
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It’s difficult for the government to know when it’s appropriate to remove the protection.
National security
Certain industries (e.g. aircraft, weapons) are essential for national security. These industries should be protected.
Evaluation
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It is difficult to decide which industries are essential to national security.
Health, safety and environmental standards
Many countries wish products to conform to certain minimum standards and thus impose regulations to ensure that all imported products meet these standards. These minimum standards can help protect the public.
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Trade barriers can restrict imports of harmful substances (including drugs).
Evaluation
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It can reduce imports of goods that threaten domestic industries.
Anti-dumping
Dumping: selling a good in the international market below the cost of production
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Dumping is an unfair trade practice and is illegal.
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Governments introduce tariffs or quotas to limit imports being ‘dumped’.
Evaluation
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Dumping is difficult to prove (foreign firms can be simply more efficient).
Avoid unfair competition
Unfair competition includes:
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Dumping.
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Using administrative barriers.
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Undervaluing currency to make their exports more price competitive.
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Violation of intellectual property.
Correct a balance of payments deficit
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Short-term solution to balance of payments deficit problem.
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Protection → more expensive imports thus less attractive → less import expenditure → higher net exports.
Evaluation
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Foreign governments may retaliate with trade barriers of their own.
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Doesn’t directly tackle the trade deficit problem.
Raise government revenue
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Tariffs → raise government revenue ↑ → government is able to protect domestic industries.
Evaluation
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Tariffs are regressive taxes and thus have a negative impact on the income distribution.
Protection of domestic jobs
Protection increases domestic production and therefore protects jobs in domestic industries.
Evaluation
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If tariffs are imposed on raw materials, then this would increase production costs in other industries. This will reduce production and employment in these industries.
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Protectionism leads to retaliation. This harms exports and increases unemployment in export-oriented industries.
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Higher employment usually involves cheap foreign labour.
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Arguments against protection
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Greater monopoly power for domestic firms → higher prices for consumers.
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Lower consumer surplus → lower purchasing power for households.
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Export-oriented firms lose their international competitiveness.
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Induce retaliation by foreign governments → trade war.
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Decreased choice for consumers.
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Less competition decreases inefficiency → misallocation of resources.