Advantage and disadvantage of protectionism

Supporters of “free trade” propose an open system, without obstacles. The protectionists believe that the government should regulate commercial matters and subsidize industries and products to protect the domestic economy.

Historically, all governments were once protectionist, from imperial Britain, propagandist of commercial freedom with other nations, Bismarck’s Germany; until the United States of the nineteenth century and, as has just been proved, also of the 21st century. The ultimate goal of the discussion is to decide with what emphasis and for how long should protectionism be applied to achieve the long-term objectives of an economy. The controversy is not only between nations competing for portions of world trade. Many times the internal debate is more intense and passionate, especially in a country like the United States.

Opposite positions

Although the intensity of government participation in trade varies from country to country and product to product, in general it could be said that trade barriers have been greatly reduced since the Second World War. But all governments practice a certain measure of protectionism. The debate focuses on whether many or few protectionist measures should be applied, what and in what way for a country to achieve its long-term macroeconomic objectives.
A completely free trade situation would allow:

– offer the population almost all goods and services at the lowest possible cost;
– give consumers the freedom to buy whoever produces the goods and services more efficiently; Y
– generate competition for national industries that could cause unemployment and lower growth in less efficient companies.

If cars can be manufactured more efficiently in another country and consumers are free to buy them anywhere, the national auto industry will lose its business and can ask the government to protect it by limiting the importation of cheaper cars.

Arguments in favor of protection There

are many arguments presented by the defenders of protectionism:

– Cheap labor: Least developed countries have a natural cost advantage because labor costs in those economies are low. They can produce more economic goods than developed economies, goods that are more competitive in international markets.

– Emerging industries : Protectionists say that new industries must be protected to give them time to grow and strengthen enough to compete internationally, especially those that can provide a solid basis for future growth, such as computing and telecommunications. Critics, on the other hand, respond to the fact that some of these nascent industries never “grow”.

– Concerns about national security: Any industry that is key to national security, such as the production of military equipment, should be protected. Thus the nation will not have to depend on foreign suppliers during political or military crises.

– Diversification of the economy : If a country channels all its resources to a few industries, it risks too much to depend on their fate. Maintaining weaker competitive industries through protection, helps to diversify the nation’s economy

– Degradation of the environmental level: In the rush to meet the global demand for their exports, more countries can compromise the safety of the environment. This is especially true in the case of less developed countries, which do not have clear laws on environmental protection in force.

Methods of protection

Governments use a series of tools to manage the position of their countries in international trade.

– Tariffs : Are taxes on exports. They make them more expensive for consumers, thus reducing demand.

– Import quotas: Sometimes governments restrict the sale of foreign products by applying import quotas. They limit the number of units that can be imported and thus help domestic producers by limiting the market share that foreign products can cover.

– Voluntary Restrictions : At other times, governments negotiate agreements through which a country voluntarily accepts to limit its exports of a certain product.

– Subsidies : Another way to achieve the objectives of protectionism is to make the national industry more competitive. Subsidies, which are government grants to an industry, are one way to achieve this. A subsidy can be:
– direct(plain and flat payment);
– indirect (the government grants special tax exemptions or incentives, purchases surpluses, gives low-interest loans or guarantees private loans). For example, the United States subsidizes, among others, sugar and dairy products.

– Commercial closure : Sometimes governments prohibit trade with certain countries for political reasons (in times of war or political crisis). They also ban the importation of certain products to protect their national industries. For example, Japan prohibits the importation of rice to protect its domestic rice industry.

– Imposition of standards: Health, environmental and safety levels vary by country. These levels can act as an obstacle to free trade and as a useful tool for protectionism. For example, the European Union requires very strict levels of safety and health for any country that wants to sell its products in that market.

– Others : Apart from legal restrictions, there may be other less formal obstacles that impede trade. One of them is the cultural factor.

Arguments in favor of free trade

The debate about how far the freedom of the commercial system should go is long-standing, with positions and arguments that evolved over time. Proponents of free trade in the United States like to say that consumers benefit from free trade and give many reasons to support their theory:

– Free trade and the resulting foreign competition compels US companies to keep their prices low .

– Consumers have a greater variety of goods and services to choose from in open markets.

– National companies have to modernize their plants, production techniques and technologies to stay competitive.

– Any type of protectionist measure, such as tariffs, usually provokes counterattacks by foreign governments, which may restrict the sale of US goods in those markets. That can result in inflation and unemployment in the United States, because the export industries suffer and raise the prices of imports.

– An open commercial system creates a better climate for investment and entrepreneurial ventures, than another where there is a fear that the government will cut off access to certain markets.

– The cost of protection is almost always higher than its benefits.

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