Discuss the extent to which the use of trade barriers by developing economies is an appropriate policy for such economies.

Protectionist measures are those such as tariffs, quotas, subsidies and regulation. Tariffs are taxes on imported goods which create revenue for the government and protect domestic industries from the high pressure of the world trade market. Quotas are limits on the amount of imports allowed in a country. Subsidies are given to the producers in order to reduce costs and encourage production in that sector.

A developing economy may decide to enforce tariffs on its importers. The government may d o this to discourage imported goods from being bought and encourage the demand for domestic goods. This would lead to domestic business’s increasing output and therefore there would be an increase in employment and the economy would see a growth in its GDP. The tax on imports would generate more revenue and allow the governments to spend in the economy, especially on education, health and infrastructure which is what many developing economies struggle with. This would therefore lead to an increase in aggregate demand. With the price of imported goods being higher than domestically produced ones, in the long run foreign suppliers are likely to decrease supply to those nations with tariffs, due to the lack of demand. Again this would stimulate growth in domestic businesses but efficient may start to occur due to lack of competition. Yet with the increase in employment their will be an increase in income and therefore disposable income will rise, presuming the cost of living does not rise extensively. Therefore with the economy growing there will be more demand for a varied choice of products. This contradicts previous theory, which suggests that one economy can produce all of its population’s goods and services. Therefore in the long run the tariff may have to be lifted to allow the economy to develop further. This would prevent the economy from experiencing hyper inflation – meeting its macro economic objective of low and steady inflation. For example Zimbabwe has is experiencing this currently and has seen negative growth and development. This shows that tariffs may be useful for a developing economy if they are temporary.

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Quotas on the other hand work by restricting the amount of an import into a country. This would allow the balance of trade position to improve as less is being imported. Also it would allow domestic industries to be protected and allow them to grow without being taken out of the market by world competitors. Quotas are a means of physical control unlike tariffs which are a tax on imported goods. This means that the government receives no revenue when quotas are applied. For example in Ghana it imports $250 per capita of foreign rice. This supplies 2/3s of it’s rice market. If the country were to produce its own rice and restrict the amount of imports through a quota it would increase employment, decrease imports and therefore improve the balance of payments situation and create growth in the primary sector (domestic).

Tariffs and quotas do have similarities; they both reduce the level of imports in an economy, and allow domestic industries to compete at a perfect level. However a dependency may occur on these measures, therefore if barriers were lifted they would be in the same position as they were before the barriers. They therefore have not become more effect of competitive. While this shows an increase in GDP there have not been any improvements to the development of the country as it is not sustainable.

Another protectionist measure is subsidies. The government may give these to domestic business’s who aren’t able to compete with world suppliers due to lack of economies of scale. A subsidy protects jobs and increase domestic supple which leads to a decrease in imports. It may also allow the producer to produce at a lower cost which may be passed on to the consumer making the business more competitive with world suppliers. The revenue gained from the subsidy may be invested in the business and spent on capital goods in order to gain from technical economies of scale. However businesses tend to become reliant on the subsidy in order to compete. Also the way in which the subsidies are applied (per tonne of produced) encourages firms to over produce, leading to a surplus and inefficiency in the way resources are used as they could be used elsewhere. The governments in developing economies already have problems with funds, therefore the question of how to pay for the subsidies arises. The opportunity cost of subsidies means less spending on education and infrastructure may fall, which are vital for a developing economy. The government may also have to borrow money in order to do this leading to an increase in national debt and the only way this can be repaid is through high taxes, this reduces disposable income in the long run. It would also effect consumer spending in the long run and cause problems with aggregate demand and growth. Subsidies can also not be allocatively efficient when they are applied to FDI’s. This would encourage investment but the subsidy is not benefiting the domestic industry that really needs it. The problem with resources and their allocation may restrict the economy in terms of growth and development.

In conclusion it is evident that developing economies do not take in all the factors when considering using protectionist measures. Protectionist measures are only effective in the long run to an economy if the domestic industries do not become reliant. The long term implications involved with these measures seem to out way the short term benefits. However without there measures the economy would experience no growth or development what so ever. The only alternative is to take into account trading blocks where the country would grow in power and the countries can benefit from each other. It is obvious that protectionism is needed in the beginning to kick start the economy however countries at a slightly higher level of development would not need this as they would be able to compete and be more efficient.

Peer Reviews

Here's what a star student thought of this essay

groat

11th of Mar 2012

Quality of writing

This essay has a strong structure, as it has a clear introduction and conclusion. The introduction allows key terms to be defined, making it easy to allocate knowledge and understanding marks. The conclusion attempts to make a justified judgement, which is good, but as mentioned above the extent needs to be addressed. I liked how the long term was considered. The style is strong, making this argument convincing. Spelling, punctuation and grammar are fine.

Level of analysis

The analysis in this essay is strong. What I particularly liked about this essay was the discussion of why a government may choose to introduce the trade barrier. This shows a good understanding of why they can be useful, but then the essay goes further to explain why they are not always useful by discussing the disadvantages. Such evaluation will gain credit! Each mechanism is well explained, with each step being linked well. I think this essay would benefit from a few diagrams. For example "This would therefore lead to an increase in aggregate demand" could be displayed with a diagram, when could then be analysed to show the effects. Although the points covered are good, there are some which have been missed out. I would be discussing the ability of trade barriers allowing domestic industries to grow. This is then a point which could be evaluated, saying that without investment or sufficient demand anyway, these domestic firms will struggle to evolve. It is key that you pick points which can be evaluated! I would've also spoken about retaliation, as this is common with trade barriers. Unfortunately, there is no discussion of the extent in this question. Yes, there is some good discussion, but the question isn't truly answered. There needs to be a paragraph saying "the extend to which it is appropriate depends upon" and then elaborating upon investment, demand in the economy, which have been mentioned above. Doing so would ensure this essay gains the top marks.

Response to question

This essay engages well, exploring what trade barriers are and then assessing whether they are appropriate for developing countries. The task is a bit cryptic, but if I was doing this essay I would've defined what is appropriate for a developing county in my introduction. I think looking at the significance of development over growth, an increase in the efficiency of domestic firms and an increased standard of living would've helped this essay focus slightly more. Saying that, there is a breadth of discussion of why trade barriers have certain consequences, showing a strong understanding.

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