Arguments For & Against Trade Protection (DP IB Economics)
Revision Note
Arguments for Trade Protection
Despite the benefits that free trade offers, there are many good arguments which would support the use of protectionism in certain instances
Arguments for Protectionism
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Infant industries |
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Sunset industries |
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Strategic industries |
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Dumping |
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Employment |
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Current Account deficit |
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Labour/environmental regulations |
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Arguments Against Trade Protection
The arguments against trade protection are evident from the impact that each form of protection has on the stakeholders. These can be summarised in the diagram below
Seven common arguments against protectionism
Reduced choice
Protectionism reduces both the quantity and variety of goods/services available to customersIncreased prices
Protectionism either reduces the supply of goods/services which leads to higher prices - or in the case of tariffs, directly leads to higher pricesIncreased costs
Manufacturers who rely on imported raw materials face higher costs of production. If protectionism is widespread it may generate inflation in the economy and/or lead to a loss of employmentRetaliation
Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures which further harm free tradeReduction in export competitiveness
Protectionism reduces the need to be efficient or to innovate. Over time this leads to higher prices and worse quality products which will reduce export salesResource misallocation
Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producersDomestic inefficiency increases
With a reduced level of competition, domestic firms will be less productively efficient and will spend less on research, development and innovation
An Evaluation of Free Trade Versus Protectionism
Trade liberalisation has helped to generate significant economic growth and economic development
As an economy moves towards free trade, structural unemployment often develops as certain industries move abroad
Without an intentional government program to retrain these workers, they often fall through the cracks and their quality of life reduces significantly
It has been argued that structural unemployment is at the heart of nationalism as angry workers seek to expel foreigners and get their jobs back
Voters are able to influence the political agenda and protectionism goes through periods of immense popularity
More economically developed countries (MEDCs) have the funds available to provide significant export subsidies to their firms
The aim is usually not to protect these firms but to help them gain a global monopoly
As monopolies develop they gain more revenue and generate more tax revenue which may go back to their government (often it goes to off-shore bank accounts)
Less economically developed countries (LEDCs) are often pushed into free trade agreements by MEDCs with a focus on resource extraction
MEDCs frequently place tariffs on the import of manufactured goods with added value from LEDCs
This prevents LEDCs from generating higher profits e.g. cocoa beans are exported from Ghana to the USA at low prices and without any import tariffs, however, there is a high tariff on the import of Ghanaian chocolate to the USA
This argument is not as simple as free trade is better. The context of the trade and the nature of the trading partners ultimately decides whether a path of free trade or protectionism would serve a nation better
There is no doubt free trade generates higher output and income, but the distribution of this income may be vastly unfair
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