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Arguments in favour of protectionism

 

Infant industry argument: It is argued that government should go in for protectionist measure to protect infant industries, or else they will not get an opportunity to survive due to international trade.

Efforts of a developing country to diversify: Developing countries need to protect industries in which they want to diversify.

Protection of employment: Protecting domestic industries also means protecting domestic employment.

Source of government revenue: Tariffs form a good source of revenue for governments.

Strategic arguments: it means use of a tariff to protect military capability. The idea is, to consume the goods of our country to promote the national industry and so, in the case of war we don't have to buy the products in a foreign country and our industries have the capacity to produce all the goods that our country need. We want tariffs to reduce the “dependence” on international resources.

Means to overcome a balance of payments disequilibrium: High imports as compared to exports might lead to severe balance of payments issues. Government might resort to protectionist measures such as tariffs and quotas to restrict import and thereby control the balance of payment disequilibrium.

Anti-dumping: Dumping is when manufacturers export a product to another country at a price either below the price charged in its home market. This harms the domestic industry and employment. The importing country might resort to protectionist measures such as tariffs to control dumping of these goods. 

 

Arguments against Protectionism

misallocation of resources: It leads to global misallocation of resources, as it supports inefficient producers and in certain cases (tariffs and quotas) consumer surplus is scarified.

 the danger of retaliation and “trade wars”:  Continuous protectionist measures by a country might lead to retaliation of other countries and they might also put protectionist measures on the imports.

the potential for corruption: Putting administrative controls might also lead to corruption.

increased costs of production due to lack of competition: Constant protection to the domestic producers and lack of competition propagates inefficiency and lack of initiative to control cost.

higher prices for domestic consumers: As we can see due to tariffs and quotas domestic consumers end up paying more.

Increased costs of imported factors of production: Imported goods become expensive which might also lead to imported inflation.

reduced export competitiveness: Continuous protection to domestic industries (such as subsidies) might make them inefficient in terms of cost and technology. In the long run they might become uncompetitive in the exports market.

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