Arguments for & Against Trade Protection (DP IB Economics)

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

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

1. Reduced choice
   Protectionism reduces both the quantity and variety of goods/services available to customers

2. Increased prices
   Protectionism either reduces the supply of goods/services which leads to higher prices - or in the case of tariffs, directly leads to higher prices

3. Increased 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 employment

4. Retaliation
   Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures which further harm free trade

5. Reduction 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 sales

6. Resource misallocation
   Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producers

7. Domestic 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