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Study notes

Justifications for Protectionism

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

Building Some Arguments for Protectionism

Fledging industry argument: Certain industries possess a possible comparative advantage but have not yet exploited enough economies of scale. Short-term protection allows the infant industry to develop its advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market.

Externalities and market failure: Protectionism can be used to internalize the social costs of de-merit goods. Or to correct for wider environmental market failures

Protection of jobs in home industries and an improvement in a country’s balance of payments

Protection of strategic industries: A government may wish to protect employment in strategic industries, although value judgments are involved in determining what constitutes a strategic sector.

Anti-dumping duties: Dumping is a type of predatory pricing behaviour and a form of price discrimination. 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 the lower prices of the foreign goods, but in the longer-term, persistent undercutting of domestic prices can force a domestic industry out of business and allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase prices and exploit the consumer. Therefore protection, via tariffs on 'dumped' goods can be justified to prevent the long-term exploitation of the consumer.

Anti-dumping duties and the World Trade Organisation

The World Trade Organisation allows a national government to act against dumping where there is genuine ‘material’ injury to the competing domestic industry.

In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury.

Usually an ‘anti-dumping action’ means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the “normal value”.

Import tariffs are not normally a major source of tax revenue for the Government that imposes them. In the UK for example, tariffs are estimated to be worth only £2 billion to the Treasury, equivalent to only 0.5% of the total tax take. Developing countries tend to be more reliant on import tariffs for extra tax revenues.

Trade Theory Import Dumping - revision video

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