What are the disadvantages to protectionism?

Answer 1

There are any number of disadvantages to an isolationist foreign policy. It can create a false sense of security in that foreign wars seem to be avoided by being isolationist. With that said, that may be a false sense of security as WW 2 demonstrated.

While a nation may be able to avoid unfavorable alliances, it also precludes favorable ones. Other nations normally of a friendly nature have no obligation to help nations that insist on isolationism. It also may not be a deterrent to powerful nations that can exploit isolationist nations as they seem to have no friends.

Answer 2

Probably many more, but,

1) Indigenous industries can become complacent and non progressive,

2) Prices for consumers are higher,

3) Poor countries are denied access to markets and there cycle of deprivation continues.

Answer 3

advantages of protectionism:

1. Infant industry argument – protect new industries
2. Diversify the economy – help develop new industries to give more diversity to economy
3. Raise revenue
4. Protect certain key industries from international competition to try and safeguard jobs.
5. Protect domestic jobs which are threatened by rise of imports.

• Disadvantages of Protection

Protection has following disadvantages:

1. Fear or Permanency

The protection once given to the infant industries is difficult to remove. The temporary protection may turn into a permanent one. The protection creates vested interest and any efforts to remove it creates unrest.

It is also difficult to fix the criteria of infant industry on account of which all industries may demand protection. The government officials may commit corruption while making provision of protection. The protected industries may not have incentive to be efficient or matured. Similarly, the protection increases the demand for domestic goods by increasing price of foreign goods. This kills the incentive to exports. Hence, the protection of infant industries is better when it is accompanied by the preannounced schedule to withdraw facilities.

2. Dumping will not be Always Bad

The protection hurts the consumers. The foreign goods become expensive due to high import tax. The consumers are deprived of the consumption of high quality goods at lower price. They are compelled to consume low quality goods at high price. Hence, dumping is not bad if the people can consume good quality goods in large quantity at lower price.

3. Impossible to be Self-sufficient

The protection is regarded essential to be self-sufficient by diversification of industries, since no country is endowed with all kinds of Natural Resources. Even the developed countries cannot be fully self-sufficient. The countries like U.S.A., Japan and Germany import many goods from other countries. The self-sufficient argument destroys the basis of international trade such as the benefits of comparative cost theory and specialization.

4. No Employment Promotion

The protection does not promote employment due to following reasons:-

(a) If other industries are receiving inputs from protected industries, the, custom duty or import restriction increase the price of the inputs. Hence, the cost of the industries using those inputs increase and the employment decreases.

(b) The protection reduces import expenditure which increases exchange rate. This reduces profit. Consequently, this affects all the industries including protected industries and reduces the employment opportunities.

(c) When a country adopts protection policy, other country may also adopt protection policy in response by imposing trade restriction. As a result of this, both export and employment decrease. Hence, protection is not only ‘self-defeating but also potentially dangerous‘.

(d) The imposition of import tax reduces the export of exporting countries. It reduces employment and income and finally reduces the import capacity as well.

5. No Improvement in Terms of Trade

The argument that the tax reduces prices in exporting countries and brings terms of trade in favour of tax-imposing country is also wrong. If the supply of exporting country is perfectly elastic, the price may remain unaffected. Similarly, if the tax restriction measure is adopted even by the unaffected country, the terms of trade return to the old position. Hence, it is said that tax should be reasonable and should not be restriction-creative.

6. Creation of Monopoly

The protection is -the mother of monopoly. There are only few industries in developing countries. In the absence of foreign competition, these industries convert into monopoly. In general, the monopolists exploit the consumers.

7. Increase in Inequality

The protection increases the inequality in distribution of national income. Generally the protection is in favour of rich. Hence, the rich become richer and the poor become poorer.

8. Misunderstanding Between Countries

If a country adopts protection policy, other country may also follow suit in response. This creates misunderstanding between countries and may also create atmosphere for war. There is continuous trade war between Japan and U.S.A. The exports of Japanese car has created trade deficit of millions of dollar to U.S.A. Due to this U.S.A. has threatened to increase cent percent custom in Japan’s car. The policy to reduce import of other countries creates

In conclusion, the free trade and protection policy both have merits and demerits. We cannot say one good and other bad. The free trade or protection both may be good according to circumstances. In present time, the developed countries seem to be more in favour of developing countries though they pretend to speak in favour of free trade.

Answer 4

· Infant industries. If sunrise firms producing new-technology goods (eg computers) are to survive against established foreign producers then temporary tariffs or quotas may be needed. · Unfair competition. Foreign firms may receive subsidies or other government benefits. They may be dumping(selling goods abroad at below cost price to capture a market). · Balance of payments. Reducing imports improves the balance of trade. · Strategic industries. To protect the manufacture of essential goods. · Declining industries. To protect declining industries from creating further structural unemployment.