Domestic and Global Protectionist Policies Affecting Economies

ECON 504 - Final Paper

Domestic and Global protectionist policies affecting economies

Throughout the global economy, there are free trade zones and there are restricted zones. Free Trade exists when there is an absence of government imposed barriers in existence between nations in order to restrict trade. When barriers such as those referred to as protectionist policies exist, free trade becomes restricted. Protection is essentially defined as any action by national governments that will give an artificial competitive advantage to domestic producers at the expense of foreign producers. National governments aim to protect their nation from the disadvantages of free trade, through protectionist policies in the form of subsidies, tariffs, local content rules, quotas, export incentives and voluntary export restraints. Reasons for protection include "The Infant Industry argument" which states that some industries in a given country may develop a comparative advantage if only they are sheltered from foreign competition for a while, by means of temporary protection. So if in the future, the infant industries 'grow up' and form a comparative advantage, the domestic economy will gain access to a larger demand market, creating an injection into the economy, resulting in increased economic activity and employment. The domestic protection argument states that free trade and increased global competition can result in structural unemployment. Therefore, it has become apparent that infant industries need to be protected, dumping prevented, domestic employment sustained and the defense and self sufficiency of a nation ensured.

The infant industry argument outlines the need for protection in order to establish industries that can form a comparative advantage in the future, if sheltered from competition for a little while. This ultimately leads to a reduction in free trade, which would otherwise have brought the advantage of imports and advanced technology. However, if these industries do grow up, and protection is successfully removed, those industries are able to provide more goods and services in an increasingly competitive environment. This means that those firms will be forced to reduce prices and adopt more efficient work practices. Therefore, even if protection is still in effect, global economies will still gain access to a wider variety of commodities imported from other countries in the long term as well as technology, thereby raising competition between products, and potentially increasing living standards in the future.

A tariff, which is defined as a tax placed on a good or service in order to artificially raise the price of it, is the most common form of protection because it raises revenue for the government. In many countries, tariffs have gradually reduced over the last 30-40 years, by 75% or more. These reductions in protectionist policies and trade barriers have contributed to a stronger industrial base, increased productivity and allow better access to international markets for exporting industries. The reduction in tariffs has also created more competition between a country's firms and foreign owned businesses selling the same good or service. With increased competition, firms are forced to adopt more efficient work practices and lower their prices. On a global scale, this has meant that more countries are gaining access to that country's export industries and can result in increasing living standards of that country's trading partners.

On the other hand, Protectionist policies also have the effect of reducing the level of technology that is shared between countries, as firms facing competition must adopt more efficient work practices. With increased globalization and the recent reduction in protectionist policies, there has been exponential growth in the use of computers by businesses, as growth in Internet access and web presence has increased rapidly. This growth in Internet usage, as a result of decreased protection, has opened the door for original producers to reach a larger market and take further advantage of economies of scale. This increases demand for local businesses, and thus creates an injection into the economy. This growth and changes to technology has meant that many country's standards of living have also risen, as most households in industrialized countries now own a computer and have access to the Internet and Internet shopping.

Another common form of protection is a subsidy, which is a cash grant given by a government to a particular industry in order to lower production costs. This allows that industry to lower its prices and gain a competitive edge compared to foreign industries. On a global scale, this will reduce the amount of income in foreign countries as most goods and services will be purchased locally because it is cheaper. This may result in some overseas industries closing down, or other governments retaliating with their own form of protectionist policy. If a government chooses to retaliate with their own form of protectionist policy, this may form a chain reaction and lead to a rise in protection in the global economy. This will be damaging to world trade and will reflect a misallocation of resources, as some of those industries will be adopting inefficient means of production.

Voluntary export restraints are agreements between national governments and foreign suppliers to limit the amount of exports to an importing country. They are usually agreed upon by suppliers in order to avoid the placement of tariffs. This has the effect of forcing domestic consumers to purchase domestically produced substitutes rather than imports. However, this may result in a decrease in living standards or a loss in the capability of achieving higher living standards as domestic industries that are protected may be inefficient and uncompetitive.

The domestic employment argument states that although protection exists to protect local industries from closing down, preventing a rise in unemployment, reductions in protection also have the ability to promote higher rates of employment for the domestic economy in the long run. This is because protection diverts resources away from the more efficient firms, creating a misallocation of resources that will reduce the level of potential economic growth. This economic growth would have otherwise generated jobs. So, continued protection will in the long run reduce the rate at which jobs are created. By implementing protection, domestic economies will maintain employment levels in the short run but has the possible consequence of decreasing an economy's ability to create employment in the future.

Deciding

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