4.2 4.3 PROTECTIONISM VS FREE TRADE 4.4

• An INFANT INDUSTRY is a new domestic industry that has not had time to establish itself and achieve efficiencies in production, and therefore CAN'T COMPETE with the already established competitor firms from abroad which have lower costs due to economies of scale. Therefore, for the infant industry to stand a chance it too must achieve economies of scale and so needs protection from imports until it grows to a size where protection is no longer needed. 

• Q. IS THIS A JUSTIFIED ARGUMENT FOR PROTECTIONISM?

• YES, in theory, if a country HAS or COULD REALISTICALLY DEVELOP AN COMPArATIVE ADVANTAGE in the production of a particular industrial good but cannot specialise in it due to lower-priced inefficient (yet larger) competitors, then it is justified in receiving some protection until it has matured enough for it to compete in global markets under conditions of free trade.

• Q. WHAT ARE THE LIMITATIONS?

• Firstly, Governments have the difficult task of identifying those specific industries that it will likely have a CA in. Secondly, those supported industries must sincerely attempt to achieve economies of scale and not simply rely on government protection, and finally in order to uphold the principles of free trade the government should cease support when the industry has matured and is no longer an infant. (Which is not always the case)

• Certain industries are essential for NATIONAL DEFENSE (such as AIRCRAFT, WEAPONS, CHEMICALS, etc...), and should be protected so that a country can produce them itself. In times of war or a national emergency, a country should not have to depend on imports for its defence. Moreover, there may be dangers in having ‘unfriendly’ nations specialise in weapons production.

• Q. IS THIS A JUSTIFIED ARGUMENT FOR PROTECTIONISM?

• While there is some merit to this argument, a problem is that it can be used by industries that have an indirect use in defence (such as the steel industry) to try to acquire protection against foreign competition. The national defence argument is a non-economic one, and so decisions should be made on political and military, not economic, grounds. Yet it is sometimes difficult to draw the line between what is essential for national defence and what is not. In the United States, goods like candles, gloves, umbrellas, plastics and others receive protection on the grounds that they are needed for national defence.

• Many countries maintain HEALTH, SAFETY, and ENVIRONMENTAL standards that all imported products must meet before they are allowed to enter. 

• Q. IS THIS A JUSTIFIED ARGUMENT FOR PROTECTIONISM?

• Each country sets its own standards, and governments are justifiably concerned that imported goods may fall short of these. However, there is a concern that these standards may sometimes be used as a form of ‘HIDDEN PROTECTIONISM’ to keep certain goods out if they are competing with domestically produced goods (see 'ADMIN BARRIERS TO TRADE')

• In the case of some countries, specialisation according to comparative advantage may not be appropriate, and countries may be better off DIVERSIFYING their production and exports. This often applies to developing countries that are very highly specialised in producing and exporting one or a few primary commodities (for example, Cuba in sugar, Ecuador in bananas, Ethiopia in coffee).

• Q. IS THIS A JUSTIFIED ARGUMENT FOR PROTECTIONISM?

• To be able to diversify, countries may have to use trade protection policies to keep out imports of goods they would like to produce themselves. For example, if a country would like to diversify into production of computers, it will have to impose barriers on imports of computers; alternatively, the government could provide subsidies to domestic computer producers.

• This argument applies only to developing countries. Moreover, it is based on the expectation that the long-term economic benefits of diversification, involving more economic growth and development, will be greater than the short-term costs in terms of inefficiencies caused by protection. However, there may be a risk involved in that governments may not know which products or industries are the most appropriate to select for protection that will allow for successful diversification. (Similarities with the 'Infant-industry' argument)

• DUMPING refers to the practice of SELLING A GOOD in INTERNATIONAL MARKETS AT A PRICE THAT IS BELOW THE COST OF PRODUCING IT (usually by providing export subsidies). 

• Dumping is considered to be an UNFAIR TRADE PRACTICE and is ILLEGAL according to international agreements. 

• Nonetheless, it is a practice that continues to be used. According to the anti-dumping argument in favour of trade protection, IF A COUNTRY SUSPECTS THAT AA TRADING PARTNER IS PRACTISING DUMPING, it should HAVE THE RIGHT TO IMPOSE TARIFFS or QUOTAS in order to limit imports of the subsidised, or dumped good.

• WHY IS IT QUESTIONABLE? Well the main problem with this argument is that because of DIFFICULTIES INVOLVED IN PROVING that dumping is being practised, many governments often USE IT AS AN EXCUSE TO OFFER PROTECTION to their domestic producers when this protection is not necessary or justifiable.

• UNFAIR COMPETITION refers to practices that countries may use in order to gain a competitive advantage over other countries in order to UNFAIRLY INCREASE THEIR EXPORTS at the expense of other countries. Examples include

  • Administrative barriers or HIDDEN PROTECTION 

  • UNDERVALUED currencies

• LIMITATIONS:-

• The problem here is similar to the case of dumping which is very difficult and time-consuming to prove as result trading partners may take advantage of such arguments to impose protectionist measures.

• A BOP DEFICIT occurs when the OUTFLOW OF MONEY from a country is GREATER THAN the INFLOW, and usually happens when there is an EXCESS OF IMPORTS OVER EXPORTS. If imports are greater than exports, it would seem that A WAY TO CORRECT THE PROBLEM WOULD BE TO IMPOSE BARRIERS TO THE ENTRY OF IMPORTS and therefore the need to make payments abroad. 

• WHY IS THIS A QUESTIONABLE ARGUEMENT?: DECREASED IMPORT EXPENDITURE, may well be COUNTERED BY FALLING EXPORT REVENUE, as TRADING PARTNERS WILL RETALIATE.

• Today, the use of tariffs for revenue purposes is MORE FREQUENT IN DEVELOPING COUNTRIES, where tariff revenues can sometimes account for as much as half or more of all government revenues. 

• The reason for this strong reliance on tariffs for revenues is related to the RELATIVE EASE OF COLLECTION WHEN COMPARED TO THAT OF DIRECT TAX since they are goods that must pass through borders where they can be monitored. 

--WHY IS THIS ARGUMENT QUESTIONABLE?--

• Ultimately tariffs are a REGRESSIVE type of tax, and so have NEAGTAIV IMPACTS ON INCOME DISTRIBUTION and ALLOCATIVE EFFICIENCY.

• The convenience of relying on tariff revenues may also work as an EXCUSE FOR GOVERNMENTS TO DELAY TAX SYSTEM REFORMS. Therefore, reliance on tariffs as a source of government revenues should be a temporary measure to be gradually phased out as countries grow and develop.

• According to this argument, restrictions on imports are needed to PROTECT DOMESTIC EMPLOYMENT. Import restrictions cause consumers to shift consumption away from imports and towards goods produced domestically. As domestic production increases, unemployment falls, since firms need to hire more labour in order to increase their supply of goods.

• WHY IS THIS ARGUMENT QUESTIONABLE? The problem with this argument is that the LOWER UNEMPLOYMENT CREATED IN SOME DOMESTIC INDUSTRIES thanks to the added protection, may well be countered by RISING UNEMPLOYMENT in THE DOMESTIC ECONOMY'S EXPORT INDUSTRIES as those foreign exporting countries harmed by the protectionism may themselves RETALIATE and IMPOSE their own IMPORT RESTIRICTIONS, impacting the domestic industry's performance and employment levels.

• WRITE A REPLY LETTER TO SINGAPORE WINE, FROM THE WTO, EXPLAINING WHY EACH OF THE ARGUMENTS PUT FORWARD ARE NOT ACCEPTABLE AND THAT THEY WILL BE REFUSED PROTECTION.

• PRODUCTION SUBSIDIES are payments per unit of output granted by the government to domestic firms that compete with imports. These types of subsidies are not to be confused with EXPORT SUBSIDES, which are aimed at lowering the unit costs of domestic exports, making them more competitive on the world stage. These types of subsidies are deemed illegal under WTO regulations as they are considered anti-competitive and go against the WTO's objective of full 'Trade-liberalisation'.

• This is often one of the strongest arguments against protectionism. If the DOMESTICALLY PROTECTED GOOD IS USED AS AN INPUT/RAW MATERIAL in the PRODUCTION OF A DOMESTIC EXPORT, then the HIGHER PRICE will RAISE THE COSTS OF PRODUCTION and ultimately RAISE ITS FINAL SELLING PRICE, making them LESS COMPETITIVE.

• As is often the case in real life, when one country imposes any form of trade protectionism, THE PENALISED COUNTRY OFTEN RETALIATES by imposing its own form of barriers resulting in a LOSE-LOSE SITUATION. 

• A quick guide to the US-China trade war (BBC)

• Like any form of government intervention aimed at reducing consumption of a particular product, BLACK MARKETS are often quick to develop, which inevitably uses up precious resources in the battle to police it.

• How tariffs and corruption can ruin a growing economy (WP)

• Making tariffs corrupt again (NYT)

• Donald Trump’s Capricious Tariffs Open the Door to Corruption

--4 MARKS--

• QP Using an international trade diagram, explain how Japanese subsidies have been “limiting Australia’s access to the Japanese rice market” (Text C, paragraph).

• QP Using an international trade diagram, explain the impact on the Kenyan government of implementing a tariff on steel imports.

• QP Using a demand and supply diagram, explain how the "imposition of the preliminary tariff" may have affected the market for new homes built in Canada (paragraph 4)

• QP Using a tariff diagram, explain the effect of the "preliminary tariffs" on Canadian consumers of drywall (paragraph 3)

• QP Using an appropriate diagram, explain the likely effect that the suggested increase in the tariff (paragraph 3) would have on the domestic production of poultry.

--8 MARKS--

• QP Using information from the text/data and your knowledge of economics, discuss the arguments for and against the protection of the domestic poultry market.

• QP Using information from the text/data and your knowledge of economics, discuss the view that the US should impose tariffs on the imported shrimp.

• QP Using information from the text/data and your knowledge of economics, evaluate the claim that trade protection measures will support economic growth in Kenya.

• QP Using information from the text/data and your knowledge of economics, evaluate the effect of the tariff on drywall on different stakeholders