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Protectionism -Arguments for and against

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Introduction

Protectionism Arguments for Protection- The Infant Industries Argument: An infant industry is an industry that is in its early stages of development. It usually only has a small percentage of the local market because of foreign competition. It generally costs the infant industries more to produce a unit than their foreign competitors, so they are disadvantaged when they come to the price of the product. Many argue that these industries need to be protected until they become more established and efficient so they can be able to compete with their more established foreign competitors. If this was to happen, then the protected industry must have the potential to sell the goods at a lower price then the foreign competitors, which means that the firm must be more efficient, and produce at a lower price. On the other hand, if the infant industry has potential to compete with foreign competition in the long run, then the entrepreneurs will start a business in that industry even if protection is not offered. If this is the case, then some may suggest that the infant industry argument is invalid and that protection is only offered to infant industries that can never establish themselves. The Strategic Industries Argument: Governments argue that it is necessary to protect certain strategic industries from competition. This is a political argument rather than a economic one, because the decision to define a certain industry as a strategic industry cannot be made purely made on an economic basis. ...read more.

Middle

So this brings the argument to that foreign labour is not unfairly cheap; but the problem is that some domestic labour is used to produce good which should be produced somewhere else. To Promote Diversification in LDCs: When a economy is diverse, it will be more flexible and is more capable of adjusting to the changing demands of the international environment. We can use tariffs and other forms of protection to promote new local industries, which leads to diversification in the economy. By making the economy more diverse, we are spreading the risks and makes the economy less prone to the price and output fluctuations. One problem with diversification is that some scarce resources may be placed into less efficient industries. To Overcome Balance of Payments Disequilibrium: When the amount of imports and exports is equal to each other, the country reaches equilibrium. When the amounts of imports and greater than the amount of exports, the country is in a deficit. In order to pay off their deficits, the country will need to loan money. In order to aid this situation, the country may use protection to discourage and limit the amounts of imports entering the country. Arguments Against Protection- Comparative Advantage: Comparative advantage is when one country has an advantage in an area of production over others, eg. Australia has a comparative advantage in producing wheat and wool over other countries because Australia has the climate and the land to do so. ...read more.

Conclusion

Reduced Incentive to Innovate: When a domestic industry is protected from competition, it will reduce the pressure on domestic industries to respond to the changing demands of the international environment. Also, with pressure and competition, the domestic producer has less incentive to develop and introduce more efficient methods of production and technological advances are then hindered. By failing to innovate, the industries are delayed to the structural changes that should occur as the industries adapt to the changing market conditions. Because of this, production will add to the waste of resources, lower productivity and will reduce international competitiveness. Protection Leads to Retaliation: It is illogical to think that a country can place barriers on another country's imports without the importing country placing barriers their exports in retaliation. By protection import-competing industries, this may in fact hamper the export-competing industries by lowering demand for their products from trade partners. A reduction in demand for exports will mean that the export industries will need to cut back on production levels and reduce employment levels. Protection Reduces Welfare: From the arguments above, we can see that protection results in a reduction in consumer demand, lowers demand for exports, increases costs, lowers productivity, places scarce resources into inefficient industries, redistributes income and it reduces international competitiveness. In the long term, this will lead to a fall in living standards and it lowers the rate of economic growth. In conclusion, the effect of protection is a fall in the general level of welfare in the economy. ?? ?? ?? ?? Alex Chu 2/05/07 ...read more.

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