Protectionism in it’s own right may be considered a hindrance to the growth of the global economy, but when applied to specific case studies, the argument for the application of certain protectionist barriers is very strong. For example, In the developed world (domestic producers) where average wages are much higher than those of the developing world (foreign producers), foreign producers are at an advantage as their production costs are smaller. Assuming all other factors of production are equal, they will be able to produce goods at a cheaper price, thus, will eventually be able to drive the domestic producers out of business. This would result in huge job loss, particularly if it this uneven competition was in a major sector. To protect jobs, the government would be driven to implementing a protectionist barrier such as a tariff on the good. This would instantly drive up the price of the foreign good and allow the domestic industry stay afloat. A perfect example of this type of protection is the French agricultural sector. Farmers due to the very high cost of living in France are unable to competitively compete against any imported agricultural products and thus require huge tariffs to be placed on all goods coming into the country. The effect of a tariff can be seen graphically in the graph shown below:
The domestic demand and supply curve, DD and SS, intersect at E to give equilibrium price of 0P and quantity 0Q. The world price for the product is at OW. At the world price OW, domestic firms are only willing to supply 0Q, but consumers demand 0Q2. The shortfall in relation to domestic demand s made up by imports of Q1Q2. If the government imposes a tariff equivalent to OWOT, domestic supply will extend from 0Q1 to 1 Q3, but domestic demand will contract from0Q2 to 0Q4. Imports will contract from Q1Q2 to Q3Q4.
The Infant Industry argument is also very strong in countries that have applied protectionist measures. A country may want to develop a certain domestic industry that it believes in the long run will improve the country’s trade or economic position, such information technology sector etc. This sector in it’s “infant years” would easily be swallowed up by international competition as its production levels and penetration to greater community may not be of great enough magnitude for it to lower prices to market rates. Therefore the government will step in and either subsidise production for the specific industry or place tariff’s on all goods of similar type being imported into the country.
Before any form of protection is implemented, a cost benefit analysis will be conducted to fully cover the externalities associated with trade barriers, such as higher prices for consumers etc. If the benefits outweigh the costs, the barrier will be put in place. This is the idealist way to look at the situation. Often the people’s voice will outweigh a treasurer’s secretary’s CBA report.
Free Trade as much as it may not be a more viable option for governments trying to hold onto seats in parliament, it is the better option for even global growth and consumers searching for the best prices as it allows for an even playing field for producers and removes a large chunk of the duty applied to all imported goods, thus giving them a very attractive price for consumers and often increases the variety of goods being imported into the country. Free trade allows for countries to develop their comparative advantage (a country has a comparative advantage in producing a good over another if the opportunity cost of producing that good is lower.) in the production of certain goods, into absolute advantage (a country has an absolute advantage when it can produce a good with less resources than another), thus creating a higher total production count. Also, protectionist measures within a country will nearly always be met with retaliatory barriers from foreign governments, restricting the flow of goods from the domestic market overseas, causing a decrease in export dollars coming into the country, this may also close out markets for investment and entrepreneurship which hinders world growth. On top of all these reasons for not wanting a protectionist based trading sector is the fact that protectionism is very expensive to the consumer and to the tax payer, subject to what type of protection is in place.
Overall, protection, when used for the right purposes, such as the protection of infant industry, and protection against obvious dumping (The export of products at a price below their cost of production), protection is beneficial, but when it is used to protect and obviously cost ineffective under-producing sector such as the French Agriculture sector it is a hindrance to growth and fair trade from legitimate exporters who would very dearly appreciate the extra export dollars.
