Arguments for and Against Protection | Trade

In this article we will discuss about the arguments for and against protection.

Arguments for Protection:

The economists at different times put forward different arguments to justify he policy of protection. Some of the arguments are, however, proved to be fallacious and so cannot be accepted. There are some other arguments which prove to be good and so these are widely accepted.

We may discuss both types of arguments for protection:

1. Infant Industries:

Many developing countries, like India, Pakistan, Sri Lanka and Bangladesh have the conditions necessary to compete success­fully in the international market, but they lack experience and expertise which take time to acquire.

The infant industry argument suggests that new industries should be given temporary protection in order to enable them to build up this experience. This argument applies where the industry is small and young, and where costs are high but fall as the industry grows.

According to this argument, there are some industries in which a country would really have comparative advantages if and only if it could get them started. If faced with foreign competition, such infant (young and growing) industries would not be able to pass the initial period of experiment and financial stresses.

But given protection for a short period, they can be expected to develop economies of mass production and they would ultimately be able to face foreign competition without protection. So, at the infant stage such indus­tries should be protected for a period till they can face competition inde­pendently.

The central idea of this argument is embodied in the saying- Nurse the baby, protect the child, and free the adult’. This argument s now widely accepted in India as a good ground of protection for a temporary period for promoting home industries at the early stages.

Critics, however, argue that most infant industries never grow up- that they continue to demand protection; so their customers continue to pay high prices. Once protection is given to such industries, it is a practice (mainly for political reasons), to remove it.

2. Diversification of Industries Argument:

A policy of production is also advocated to diversify a developing country’s industrial structure. A country cannot rely on one or a few industries only; it is necessary that a large number of industries of diverse varieties develop in the long run. This strategy will reduce the risk of losing foreign markets; for, in case of failure to export one commodity, other goods may be exported.

3. Employment Protection:

The dynamics of the world economy mean that at any time some industries will be in decline. If those industries were responsible for a significant amount of employment in a country in the past, their decline would cause problems of regional unemployment. There s justification for a country to protect a contracting industry to slow down its rate of decline so that time is given for people to find jobs elsewhere in the economy.

4. Employment Creation:

Protection to home industries may create em­ployment opportunities in the country, and thus reduce the magnitude of unemployment. But this argument is also fallacious; for protection may create employment in some home industries, but by reducing imports it reduces employment opportunities in the foreign countries.

So, such a beggar-my-neighbour high-tariff policy might create employment in the short run only before other nations retaliate. Protection can of course increase employment in another way. By improving the balance of trade it can increase employment and income provided the other countries do no retaliate. But even this argument is not convincing as protection cannot maintain high employment indefinitely through export surplus.

5. Balance of Trade:

Some countries experience imbalance in their trade with the rest of the world. If they are importing too many goods they may correct a temporary problem by imposing tariffs on imports. A suitable tariff policy can create and maintain a favourable balance of trade.

The restrictions on imports for the purpose of protection will create a surplus in the balance of trade of the country. But this argument is wrong. If all countries simulta­neously follow this policy, none would find foreign buyers for the sale of goods and so none would gain. However, Sir Arthur Lewis has put forward a counter argument here.

As he says: “National income cannot be increased by adding imports, since this would result only in diverting resources to the production of articles of domestic consumption, thereby with drawing them from the most profitable export markets. Nor can domestic employ­ment be increased by reducing imports because this would reduce exports to the same extent”.

6. Dumping to Reflect Low Marginal Cost of Production:

Dumping is a problem which confronts many countries. It is an example of price discrimi­nation at the international level. By following the practice of dumping foreign sellers try to capture the home market by selling their goods at low prices.

Protection of home industries is necessary to resist such a policy. It refers to the selling of products on overseas markets at prices below those prevailing on domestic markets. The danger here is that the dumping of products could cause prices to drop drastically.

This could benefit the consumers in the short run. But, in the long run, domestic producers could be forced out of business making room for the foreign suppliers in the future. Producers may be off-loading products on foreign markets to keep prices up in their home markets. The price of a Japanese camera, for example, is higher in Tokyo than in New York. Therefore, the effects of dumping are undesirable and, if it can be detected, some protection against its adverse effects is justified.

7. Improving the Terms of Trade:

Countries can improve their position when they are the sole (or dominant) buyer of a commodity. This is rare, but if American importers of tea agreed with one another to restrict imports’ then the world price would fall. Of course, this would lower the incomes received by the producers of tea and so might be thought undesirable as they are mostly poor countries.

8. Retaliation:

Protecting an industry as a retaliation for protection introduced by other countries is questionable. It was used by the USA when it felt that the European Union was using hidden subsidies to lower the price of steel exported to the USA.

9. Unfair Foreign Competition:

Often countries follow a policy of protec­tionism against unfair foreign competition. ‘Unfair’ competition can take a variety of forms. Sometimes, foreign governments can subsidise their export industries. This means that domestic industries cannot compete fairly.

Similarly, foreign firms may ‘dump’ their products overseas, either because they cannot be sold on their domestic market, or in order to destroy competitor. They could then increase their prices and make large profit Countries also require protection against low-cost imports.

It is often argued that declining industries need a period of protection in order to allow the decline to take place gradually, so that workers can retrain as new industries develop. A variation of this approach says that industries in high wage countries should have protection against goods made by low-paid labour.

This, of course, denies the advantages of comparative advantage which derive from lower- costs. Instead, the argument is that if foreign firms pay low wages, this is a form of unfair competition and domestic firms should be protected. This would safeguard the position of domestic workers Critics, however, argue that this would, in fact, reduce the wages of workers in poor countries and make consumers of rich countries pay higher prices.

Protecting an industry against ‘unfair’ competition is also questionable countries often will claim that competition is unfair when, in fact, a country may just be using its comparative advantage to lower costs.

This argument is used against some of the low-wage economies and the difficult issue is to decide whether wages are low due to the abundance of labour as a factor of production or whether exploitation is present. If the latter is the case, protection may not be the answer to the problem.

Fallacious Arguments:

The following arguments for protection are found to be fallacious:

1. Keeping Money at Home Argument:

According to Abraham Lincon, protection prevents the purchase of foreign goods and thereby keeps money at home. But this argument loses much of its weight when we observe that owing to protection the people of the country are to pay higher prices for home-produced goods.

2. Home Market Argument:

It is argued by Henry Clay and other American protectionists that the restriction on the imports of foreign goods will create a wide domestic market for the products of the home industries. But this argument is also fallacious because protection, by curtailing imports, will reduce exports’ too. It is true that home industries will lose the foreign markets if the same policy is pursued by foreigners.

3. National Defence Argument:

Industries which are essential for the defence (e.g., arms and ammunitions, military equipment, etc.) of the coun­try are to be protected to preserve the national independence of a country. The policy of discriminating protection as adopted in India also in 1949-50 prescribed protection for defence industries at any cost.

4. National Self-Sufficiency Argument:

Protection is also advocated to attain self-sufficiency in essential goods. The industries which are essential for national self-sufficiency are to be protected. This is really a convincing argument for protection in developing countries like India. In fact, national interest is the sole criterion for granting protection to industries in such countries.

Arguments Against Protection:

The policy of protection is also criticised on various grounds:

(a) It creates obstacles or barriers to free multinational trade. Due to high tariffs imposed by other countries, a country is not allowed to produce goods in which it has cost advantages. So, protection reduces world production and con­sumption of internationally traded goods,

(b) Owing to higher tariff on imports, the consumers are compelled to buy home goods, often of inferior quality and often at higher prices,

(c) Protection gives shelter to weak home industries. If it is permanent, home industries would not get any incentive to compete freely with their foreign counterparts. There would be need for continuation of protection for an indefinite period,

(d) Protection may lead to trade wars and international conflicts among trading nations,

(e) Protection give rise to such abuse as ‘wire-pulling’ in political quarters, vested interest in the protected sector, etc.

Conclusion:

Although protection has some disadvantages, the develop­ing countries like India can follow the policy of protection at the early stages of industrial revaluation. The ultimate object should be to accelerate the rate of economic growth and the pace of development.

According to Alan S. Blinder, the case against protectionism, described as a negative-sum game, where the losing consumers lose more than the winning protected producers win, involves even more problems. There are four other problems with trade restrictions.

First, protectionism allows high-cost producers that would otherwise fail to survive. Second, trade restrictions have a habit of affecting other industries. For example, automo­biles need protection because the ball bearings, steel and textiles that pro­vide inputs to automobiles are protected.

Third, foreign nations often retaliate against protectionism. Tit-for-tat is the modus operandi in interna­tional trade: Country A raises barriers on product X because Country B did it to product Y. Fourth, trade restrictions are not really job-saving or job-cre­ating, but job-swapping.

Protectionism raises the exchange rate, hurting ex­ports in unprotected industries. Because in the long run the value of exports must be equal to the value of imports, we end up exchanging the products of inefficient unprotected industries for those inefficient protected industries.