Protectionism-Benefits and Costs
Why protectionism is advantageous
It prevents dumping
Protectionism prevents large and well-established foreign firms from selling their products at prices lower than domestic firms’ costs of production. These foreign firms may lower their prices in order to penetrate new markets. Or they may have lower costs because they enjoy the advantages associated with large-scale production that result in low unit costs. Without protectionism, local firms will be suppressed by dumping.
Opportunity for newly established firms to mature
The government may use policies such as tariff or embargo to give newly created domestic firms the opportunity to grow up. Normally, these new businesses do not have the capacity required to ensure they enjoy efficiency and economies of scale. They may lack skillful workers, latest technology, market size, and research and development capability. It is, therefore, necessary to be protected until they develop the necessary competencies.
It saves domestic jobs
Free trade may stifle local firms and make them to shut down. They become less attractive to investors if they cannot cover their costs due to competition.
Protection from cheap foreign labour
Some foreign companies have access to cheap labour that can result in lower production cost. Consequently, they can pass the benefit to consumers in form of lower prices. This will make it difficult for domestic firms to compete with them on price basis.
Protecting key industries
The government may need to protect certain industries because they are vital to its economy, e.g. agriculture, oil, steel, defence, etc. A country that depends on a particular industry for most of its export earnings will want to shield it against foreign competition. A country may also want to protect an industry for diversification purposes.
Prevents importation of harmful products
Government does not allow free trade in certain products because they may be harmful to the citizens. Therefore, restriction is placed on them to reduce the amount getting into the country. Examples of these goods include alcohol and drugs.
A source of revenue
Tariffs are an important source of revenue for the government. The revenue generated can be used to fund government expenditure and prevent a budget deficit.
Why protectionism may not be advantageous
It restricts competition
Giving protection to domestic businesses reduces their efficiency in the use of resources. They may not control the cost and quality of their products. Consumers, as a result, end up paying higher prices than they would pay if foreign products are freely traded in the country. Thus, the welfare of consumers is reduced.
Less consumer choice
Consumers will be deprived of alternative products from foreign suppliers if there is an embargo on foreign products. This may mean that consumers do not get value for money in terms of the quality of the products they consume.
It triggers retaliation
When tariffs, as an example, are used prices of foreign products become higher than the prices of domestic products. This will reduce the importation of those goods and reduce revenue going to the country producing them. Other countries may retaliate which will reduce revenue going to the country’s exporters. Trade war may ensue due to protectionism. All the countries involved in a trade war lose.
It prevents countries specialising in what they are good at
Every country should concentrate on goods they can produce cheaply than others. Protectionism may make a country’s industries continue producing goods in which they have a cost disadvantage.