Reasons for Protectionism
Protection of a young industry
New and small firms known as
‘infant industries’ will be unable to benefit from the economies of scale
enjoyed by larger foreign competitors. These infant industries will have higher
prices than foreign firms and so will be unable to sell their goods. Tariffs or
other forms of protection can be used to make foreign goods dearer and so allow
infant industries to grow.
To prevent unemployment
Due to cheaper imports, people
may not buy the goods produced within the country and as a result of this, the
home industries decrease production due to lack of demand, this further leads
to workers becoming redundant and industries closing down. This leads to
structural un- employment so in order to prevent unemployment, protectionist
policies are carried out.
To prevent dumping
Protectionism is carried out in
order to prevent dumping of goods. Dumping occurs when one country
floods the market in another country with a product at a price far less
than it costs to produce in order to force rival firms in that country out of
business. Eg: Japan
was accused of using dumping to take over
a global lead in the production of television screens and motorbikes,
forcing producers of these products in many other countries out of business.
Balance of payments problem
If a country is persistently
spending more on imports than it is earning from exports, it is getting into
debt with the rest of the World. if it
finds difficulty in increasing its exports it may be forced to remedy
the situation by placing limits on its
imports. So protectionism may be used to overcome a deficit in the balance of
payments.
Strategic arguments
Some industries may be regarded
as essential to secure a country’s survival in time of war. It may be necessary
to protect agriculture, steel, chemicals and several types of engineering
industries by tariffs and quotas to prevent firms from being driven out of
business by foreign competition.
Because other countries use barriers to trade
Before any country removes
barriers to trade on foreign goods it needs to be sure that foreign countries
will remove barriers to trade on their goods. With many dozens of trading
countries, it is very difficult to get agreement on removal of barriers to
trade.
To prevent overspecialization
Free trade encourages countries
to specialize in the goods in which thay have a comparative advantage. Yet
specialization in one or two products can be dangerous in the modern World.
The demand for goods &
services is always changing and if a country relies on just on or two goods it
risks a huge fall in its income if demand moves away from these goods to
others. Protectionism allows a country to keep a wider range of industries
alive and so prevents dangers of over-specialization.
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