Discuss in detail the arguments in favour of protectionism (Protectionism and Free Trade). Restrictions protect domestic manufacturers. On the other hand, in free trade, small businesses from developing countries get access to the international market. This is not always beneficial for flourishing economies. Free trade eventually causes job outsourcing
Discuss in detail the arguments in favour of protectionism (Protectionism and Free Trade)
INTRODUCTION
Protectionism refers to a deliberate policy on the part of the government to erect trade barriers, such as tariffs and quotas, in order to protect domestic industries against international competition. 🗸🗸
[Accept any other relevant definition]
[Max 2]
BODY-MAIN PART
Raising revenue for the government
- Import tariffs raise revenue for the government. 🗸🗸
- In smaller countries the tax base is often small due to low incomes of individuals and businesses. 🗸🗸
- Low incomes do not provide much in the form of income taxes and therefore custom duties on imports is a significant source of income or revenue. 🗸🗸
Protecting the whole industrial base
- Maintaining domestic employment. 🗸🗸
- Countries with high unemployment are continuously pressured to stimulate employment creation and therefore resort to protectionism in order to stimulate industrialisation. 🗸🗸
- It is thought that using protectionism the country’s citizens would purchase more domestic products and raise domestic employment. 🗸🗸
- These measures on domestic employment creation at the expense of other countries, led to such measures as “beggar-my-neighbour” policies. 🗸🗸
- Applying import policies is likely to reduce other countries ability to buy country’s exports and may provoke retaliation. 🗸🗸
Protecting workers
- It is argued that imports from other countries with relatively low wages represent unfair competition and threaten the standard of living of the more highly paid workers of the local industries. 🗸🗸
- Local industries would therefore be unable to compete because of higher wages pushing up the price levels of goods. 🗸🗸
- Protection is thus necessary to prevent local wage levels from falling or even to prevent local businesses from closing down due to becoming unprofitable. 🗸🗸
- Competition from low-wage countries may also reflect the fact that those countries have a comparative advantage in low-skilled labour-intensive industries. 🗸🗸
Diversifying the industrial base
- Overtime countries need to develop diversified industries to prevent overspecialisation. 🗸🗸
- A country relying too heavily on the export of one or a few products is very vulnerable. 🗸🗸
- If a developing country’s employment and income is dependent on only one or two industries, there is the risk that world fluctuations in prices and demand and supply-side problems could results in significant fluctuations in domestic economic activity. 🗸🗸
- Import restrictions may be imposed on a range of products in order to ensure that a number of domestic industries develop. 🗸🗸
Develop strategic industries
- Some industries such as the iron-ore and steel, agriculture, (basic foodstuffs, such as maize), energy (fuels) and electronics (communication) among others, are regarded as strategic industries. 🗸🗸
- Developing countries may feel that they need to develop these industries in order to become self-sufficient . 🗸🗸
Protecting specific industries
Dumping
- Foreign industries may engage in dumping because government subsidies permit them to sell at very low prices or because they are seeking to raise profits through price discrimination. 🗸🗸
- The reason for selling products at lower prices may be to dispose of accumulate stocks Of the goods and as a result consumers in the importing country stand to benefit however,
- Their long term objective may be to drive out domestic producers and gain control of the market and consumers
- Are likely to lose out in the reduction in choice and higher prices that the exporters will be able to charge. 🗸🗸
Infant industries
- Usually newly established and find it difficult to survive due to their average costs being higher than that of their well-established foreign competitors. 🗸🗸
- However, if they are given protection in their early years they may be able to grow and Thereby take advantage lower their average costs and become competitive and at this point protection can be removed. 🗸🗸
Declining industries/sunset industries
- Structural changes in the demand and supply of a good may severely hit an industry such industries should be permitted to go out of business gradually declining industries
- Are likely to be industries that no longer have a comparative advantage and however, if they go out of business quickly there may be a sudden and large increase in unemployment. 🗸🗸
- Protection may enable an industry to decline gradually thereby allowing time for resources including labour to move to other industries. 🗸🗸
- Protecting domestic standards domestic regulations of food safety human rights and environmental standards have been increasingly acting as trade restrictions. 🗸🗸
[Accept any other relevant fact]
[Max 26]
ADDITIONAL PART
South Africa promotes exports through subsidies
Direct Subsidies
- Strict screening measures should be put in place when companies apply for financial assistance. Government expenditure can provide direct financial support to domestic producers for their exports e.g. 🗸🗸
- Cash grants offered to South African exhibitors to exhibit their products at exhibitions overseas. To explore new markets. 🗸🗸
- Foreign trade missions to explore new markets imposition of tariffs on imports. 🗸🗸
- Funds for the formation of formal export councils. 🗸🗸
- Subsidies for training or employing personnel. 🗸🗸
- Funds for the export market research. 🗸🗸
- Product registration and foreign patent registrations. 🗸🗸
Indirect subsidies
- Government can refund companies certain taxes to promote exports.
- These types of indirect subsidies are:
- General tax rebates (Part of the cost of production can be subtracted from the tax that has been paid) 🗸🗸
- Tax concessions on profits earned from exports or on capital invested to produce export goods. 🗸🗸
- Refunds on import tariffs in the manufacturing process of exported goods companies often use custom duties are paid on these goods and the government refunds them. 🗸🗸
[Max 10]
CONCLUSION
Most countries agree that protectionism is harmful to the economy if not well managed. Protectionism is needed especially where industries are young and need expansion or development. 🗸🗸
[Any other relevant higher order conclusion]
[Max 2]