Arguments against protectionism, Managerial Economics

Arguments against protectionism 

Most of the arguments for protectionism may be met with counter arguments, but underlying the economic arguments as opposed to the social, moral, political, strategic,  etc, is the free trade argument.

Free trade argument

This, in brief, maintains that free trade allows all countries to specialize in producing commodities in which they have a comparative advantage.  They can then produce and consume more of all commodities than would be available if specialization had not taken place.  By implication, any quotas, tariffs, other forms of import control and/or export subsidies all interfere with the overall advantages from free trade and so make less efficient use of world resources than would otherwise be the case.

Reduced output argument

It has been said that import controls will protect jobs initially, but not in the longer run.  If we in the home country limit imports, then other countries will have less of our currency with which to buy our exports. 

This will lead to a decline in sales and a loss of jobs in  export industries.  The overall effect is likely to be a redistribution of jobs from those industries in which the country has a comparative advantage to those in which it has a comparative disadvantage.  The net result will be that total employment is unchanged but total output is reduced.

The infant industries seldom grow up

The infant industry argument is sometimes met with the claim that infant industries seldom admit to growing up and cling to their protection when they are fully grown up.  Most economists, however, appear to accept the infant industry argument as a valid case for protection provided it is temporary.

Gains from comparative advantage

The argument for protection against low wage foreign labour is partly a moral argument which is outside the scope of positive economics, but even the economic part of the argument that it will drag down the living standards of high wage economies can be shown to be invalid.  It is true as noted above that the payment of low wages will allow a country to export their goods cheaply and so possibly undercut those of high wage countries.  However, it must be noted that countries importing these cheap goods gain by virtue of their low cost in terms of the goods required to be exported in return.  This again is another use of the comparative advantage argument.

No Validity in economics

The other arguments such as the need to avoid over dependence on particular industries and the defence argument are really strategic arguments which are valid in their own terms and for which economic science is largely irrelevant.

Retaliation

Advocates of free trade also believe that if one country imposes import restrictions, then those countries adversely affected will impose retaliatory restrictions on its exports, so it will not end up any better off.  This could lead to a "beggar-my-neighbour" tariff war, which no one can benefit from, and which contracts the volume of world trade on which every country's international prosperity depends.

Inflation

If key foreign goods are not free to enter the country (or cost more), this will raise their prices and worsen the rate of inflation in the country.

Inefficiency

It is argued that if home industries are sheltered from foreign competition there is no guarantee that they will become more efficient and be able to compete in world markets.

Posted Date: 11/30/2012 5:02:25 AM | Location : United States







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