Arguments for and Against Protection | Trade Policy

Let us learn about Arguments for and Against Protection.

Arguments for Protection:

The concept of protection is not a post-Second World War development. Its origin can be traced to the days of mercantilism (i.e., 16th century). Since then various arguments have been made in favour of protection. The case for protection for the developing countries received a strong support from Argentine economists R. D. Prebisch and Hans Singer in the 1950s.

All these arguments can be summed up under three heads:

(i) Fallacious or dubious arguments

(ii) Economic arguments

(iii) Non-economic arguments

(i) Fallacious Arguments:

Fallacious arguments do not stand after scrutiny. These arguments are dubious in nature in the sense that both are true. ‘To keep money at home’ is one such fallacious argument. By restricting trade, a country need not spend money to buy imported articles. If every nation pursues this goal, ultimately global trade will squeeze.

(ii) Economic Arguments:

(a) Infant Industry Argument:

Perhaps the oldest as well as the cogent argument for protection is the infant industry argument. When an industry is first established its costs will be higher. It is too immature to reap economies of scale at its infancy. Workers are not only inexperienced but also less efficient.

If this infant industry is allowed to grow inde­pendently, surely it will be unable to compete effectively with the already established industries of other countries. Thus, an infant industry needs protection of a temporary nature. Given time to develop an industry, it is quite likely that in the near future it will be able to develop a comparative advantage, withstand foreign competition, and survive without protection.

It is something like the dictum:

Nurse the baby, protect the child and free the adult. Once an embryonic industry gets matured it can withstand competition. Com­petition improves efficiency. Once efficiency is attained, protection may be withdrawn. Thus, an underdeveloped country attempting to have rapid industrialization needs protection of certain industries.

However, in actual practice, the infant industry argument, even in LDCs, loses some strength. Some economists suggest production subsidy rather than protection of certain infant industries. Protection, once granted to an industry, continues for a long time.

On the other hand, subsidy is a temporary measure since continuance of it in the next year requires approval of the legislature. Above all, expen­diture on subsidy is subject to financial audit. Thus, protection is something like a “gift”.

Secondly, protection saps the self- sufficiency outlook of the protected industries. Once protection is granted, it becomes difficult to withdraw it even after attaining maturity. That means infant industries, even after maturity, get ‘old age pension’. In other words, infant industries become too much dependent on tariffs and other countries.

Thirdly, it is difficult to identify potential comparative advantage industries. A time period of 5 to 10 years may be required by an industry to achieve maturity or self-sufficiency. Under the circumstances, infant industry argument loses force.

In view of these criticisms, it is said by experts that the argument “boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective.”

These counter-arguments, however, do not deter us to foster the growth of infant industries in less developed countries by means of tariff, rather than subsidies.

(b) Diversification Argument:

As free trade increases specialization, so protected trade brings in diversified industrial structure. By setting up newer and variety of industries through protective means, a country minimizes the risk in production. Comparative advantage principle dictates narrow specialization in production.

This sort of specialization is not only undesirable from the viewpoint of economic development, but also a risky proposition. Efficiency in production in some products by some countries (e.g. coffee of Brazil, milk products of New Zealand, oil of Middle East countries) results in over-dependence on these products.

If war breaks out, or if political relations between countries change, or if rece­ssionary demand condition for the product grows up abroad, the econo­mies of these industries will be greatly injured. Above all, this sort of un­balanced industrial growth goes against the spirit of national self- sufficiency. Protection is the answer to this problem. A government en­courages diverse industries to develop through protective means.

However, a counter-argument runs. Politics, rather than economics, may be the criterion for the selection of industries to be protected in order to produce diversification at a reasonable cost. But, one must not ignore economics of protection.

(c) Employment Argument:

Protection can raise the level of employment. Tariffs may reduce import and, in the process, import-competing industries flourish. In addition, import-substituting industries—the substitution of domestic production for imports of manufactures—develop. The strategy of import-substituting industrialization promotes domestic industry at the expense of foreign industries.

Thus, employment potential under protective regime is quite favourable. In brief, tariff stimulates investment in import-competing and import- substitution industries. Some invest­ment produces favourable employment multiplier.

But cut in imports following import-substituting industrialization strategy may ultimately cause exports to decline.

(d) Balance of Payments Argument:

A deficit in the balance of payments (BOP) can be cured by curtailing imports.

However, imports will decline following a rise in tariff rate, provided other trading partners do not retaliate by imposing tariff on a country’s export. Import restrictions through tariff may be uncalled for if the balance of payments crisis becomes chronic. In view of this and other associated problems of tariff, it is said that tariff is a second best policy.

(e) Anti-Dumping Argument:

Usually, we hear about unfair competition from firms of low-cost countries. One particular form of unfair competition is dumping which is outlawed by international trade pacts, such as WTO. Dumping is a form of price discrimi­nation that occurs in trade.

Dumping occurs when a country sells a product abroad at a low price because of competition and at a high price in the home market because of monopoly power. In other words, dumping is a kind of subsidy given to export goods. This unfair practice can be prevented by imposing tariff. Otherwise, workers and firms competing with the dumped products will be hit hard.

(f) Strategic Trade Advantage Argu­ment:

It is argued that tariffs and other import restrictions create a strategic advantage in producing some new products having potential for generating some net profit. There are some large firms who prevent entry of new firms because of the economies of large scale production.

Thus, these large firms reap pure profits over the long run during which new firms may not dare enough to compete with these established large firms. Thus, the large scale economies themselves prevent entry of new firms.

But as far as new products are concerned, a new firm may develop and market these products and, ultimately reap substantial profit. Ultimately, successful new firms producing new products become one of the few established firms in the industry.

New firms showing potential for the future must be protected. “If protection in the domestic market can increase the chance that one of the protected domestic firms will become one of the established firms in the international market, the protection may pay off.”

(iii) Non-Economic Arguments:

(a) National Defense Argument:

There are some industries which may be inefficient by birth or high cost due to many reasons and must be protected. This logic may apply to the production of national defence goods or necessary food items.

Whatever the cost may be, there is no question of compromise for the defence industry since ‘defence is more important than opulence’. Dependence on foreign countries regarding supply of basic food items as well as defence products is absolutely unwise.

However, objections against this argument may be cited here. It is difficult to identify a particular item as a defence industry item because we have seen that many industries—from garlic to clothespin—applied for protection on defence grounds.

Candle stick-maker (for emergency lighting) and toothpick-makers (to have good dental hygiene for the troops) demanded protection at different times at different places! A nation which builds up its military strength through tariff protection does not sound convincing. Thus, tariff is a second-best solution.

Arguments against Protection:

There are some good ‘side-effects’ or ‘spill-over effects’ of protection. This means that it produces some undesirable effects on the economy and the basic objective of protection can be attained rather in a costless manner by other direct means other than protection. That is, protection is never more than a second-best solution.

Firstly, protection distorts the com­parative advantage in production. This means that specialization in production may be lost if a country imposes tariff. All these lead to squeezing of trade.

Secondly, it imposes a cost on the society since consumers buy goods at a high price. Thirdly, often weak declining industries having no future potential stay on the economy under the protective umbrella. Fourthly, international tension often escalates, particularly when tariff war begins.

Usually a foreign country retaliates by imposing tariff on its imports from the tariff-imposing country. Once the retaliatory attitude (i.e., ‘beggar-thy- neighbour policy’) develops, benefits from protection will be lost. Finally, protection encourages bureaucracy. Increase in trade restrictions means expansion of governmental activity and, hence, rise in administrative cost. Bureaucracy ultimately leads to corruption.