Study Notes

Arguments in Favour of Protectionism

AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 22 Mar 2021

What are the main arguments in favour of a country imposing one or more "protectionist" measures? The main arguments supporting protectionism are outlined below.

Infant or Fledging industry Argument

Certain industries have a possible comparative advantage but have not yet exploited sufficient economies of scale to bring their unit costs down to competitive levels. Short-term protection might allow an infant (or fledgling) industry to develop a cost advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market. Of course, the risk is that these controls become semi-permanent.

Protection of Strategic Industries

A government may wish to protect employment and investment in strategic industries, although value judgments are involved in determining what a strategic sector is.

Protection against Dumping

Dumping is a type of predatory pricing behaviour and can often be a concern for domestic firms facing overseas competitors who are looking to offload their spare production in international markets at very low prices. Goods are dumped when they are sold for export at less than their normal value. The normal value is usually defined as the price for the like goods in the exporter’s home market. In the short term, consumers benefit from lower prices of the foreign goods, but in the longer-term, persistent undercutting of domestic prices can force a home-based industry out of business and then allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase their prices and exploit the consumer. Protection via tariffs on 'dumped' goods can be justified to prevent long-term exploitation of the consumer.

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