Arguments against Protectionism | tutor2u Economics
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Arguments against Protectionism

  • Levels: A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

What are the main economic and social arguments against trade protectionist policies?

Trade Tariff Analysis - revision video
  1. Market distortion and loss of allocative efficiency
  2. Higher prices for consumers: Tariffs push up the prices for consumers and insulate inefficient sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.
  3. Reduction in market access for producers: Export subsidies depress world prices and damage output, profits, investment and jobs in many lower-income developing countries that rely on exporting primary and manufactured goods for their growth.: Protectionism can be an ineffective and costly means of sustaining jobs.

Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer surplus. Welfare is reduced through higher prices and restricted consumer choice. The welfare effects of a quota are similar to those of a tariff – prices rise because an artificial scarcity of a product is created.Extra costs for exporters: For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting themRegressive effect on the distribution of income: Higher prices from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income.Production inefficiencies: Firms that are protected from competition have little incentive to reduce their production costs. This can lead to X-inefficiency and higher average costs.Trade wars: There is the danger that one country imposing import controls will lead to retaliatory action by another leading to a decrease in the volume of world trade. Retaliatory actions increase the costs of importing new technologies affecting LRAS. Students should mention game theory when discussing the risks of retaliation with countries embroiled in trade disputes.Negative multiplier effects: If one country imposes trade restrictions on another, the resultant decrease in trade will have a negative multiplier effect affecting many more countries because exports are an injection of demand into the global circular flow of income.Second best approach: Protectionism is a second best approach to correcting for a country's balance of payments problem or the fear of structural unemployment. Import controls go against the principles of free trade. In this sense, import controls can cause government failure.

Arguments against protectionism

Economic Nationalism

Economic nationalism describes policies to protect domestic consumption, jobs and investment using tariffs and other barriers to the movement of labour, goods and capital

The term gained a more specific meaning in recent years after several European Union governments intervened to prevent takeovers of domestic firms by foreign companies. In some cases, the national governments also endorsed counter-bids from compatriot companies to create 'national champions'. Such cases included the proposed takeover of Arcelor (Luxembourg) by Mittal Steel (India). And the French government listing of the food and drinks business Danone (France) as a 'strategic industry' to block potential takeover bid by PepsiCo (USA

Analysis of the effects of an import tariff on consumer welfare

The deadweight loss of welfare from an import tariff

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