Case for and against International trade restrictions

Case For:

  • Infant Industry Argument – If an industry is just developing, with a good chance of success once it is established and reaping economies of scales, then it is necessary to protect it from (external) competition temporarily until it reaches levels of production and costs which allow it to compete effectively with established industries elsewhere. This argument is most commonly used to justify the high level of protection that surrounds the manufacturing industry in developing countries, as they attempt to replace foreign goods with those produced/made in their own country (import substitution strategy).
  • Cheap Labour – It’s often argued that the economy must be protected from imports which are produced with cheap labour; that buying foreign goods (imports) from low wage countries amounts not only to unfair competition, but continues to encourage the exploitation of cheap labour in those countries as well as undermining the standard of living of those in high wage economies.
  • Dumping – Dumping occurs where goods are sold in a foreign market at prices below their cost of production or at prices below the prices in the country of origin. This may be undertaken either by a foreign monopolist, using high profits at home to subsidize exports for political or strategic reason.
    Countries in which such products are sold feel justified in undertaking protectionism. This is because dumping could result in the elimination of home industries, and the country then becomes dependent on foreign goods which (although cheap in relative terms)have no guaranteed quality standards.
  • Balance of payments (BOP) and Budget Deficits – If a country had a persistent BOP deficit, it’s unlikely to be able to finance from its limited reserves. It therefore becomes necessary for it to adopt some form of restriction on imports e.g. tariffs which also act as a source of revenue.
  • Danger of over-specializing – A country may feel that in its long-term interest it should not be too specialized. A country may not wish to abandon production of certain key commodities even though the foreign product is more competitive, because it will then be too dependent on imports. In future, prices of such goods may rise or supplies may diminish. It is for this reason that countries wish to remain largely self-sufficient (e.g. in food – as a security);
    Specialization gains in terms of comparative advantage could be enjoyed in the meantime, but in future, demand may fall and the country suffers disproportionately (e.g. loss/reduction of foreign exchange earnings). In this case, a country will then diversify into production of other goods while restricting importation of same or similar products.
  • Strategic Reasons – a country may find it‟s not in its interest to be dependent on imports, and can protect a home industry regardless of its efficiency status. Many countries maintain industries for strategic reasons e.g. the steel industry, shipping, agriculture etc
  • Structural unemployment – decline of a highly localized industry due to international trade causes great problems of regional (structural) unemployment. If it would take time to re-locate labour to other jobs/sectors, then the government, under considerable political and humanitarian pressure, tends to restrict the imports that are causing the industry to decline.
  • Bargaining power – even when a country sees no economic benefit in protection, it may find it useful and effective to maintain (impose) tariffs and /or other forms of restriction as bargaining gambits in negotiating better terms with other countries.

Case against:

  • Free Trade Argument – This maintains that free trade allows all countries to specialize in producing commodities in which they have comparative advantage. They can produce and consume more of all commodities than would be available if specialization had not taken place. By implication, any quotas, tariffs, other forms of import controls and/or export subsidies would interfere with the overall advantages from free trade and thereby making less efficient the use of world resources.
  • Monopoly Power – Protection could make industries with high capital base to develop monopoly power, and such power is socio-economically undesirable in terms of output restriction (output deficiency) and considerably higher prices, which militate against living standards (welfare).
  • Retaliation – Advocate of free trade also advance the argument that if one country imposes import restrictions, then those countries adversely affected will impose retaliatory restrictions on its exports and thereby ending up not having any gainful net effect. This could also lead to a tariff war which no country can benefit from, and which contracts the volume of world trade on which every country’s international prosperity depends.
  • Inflation – If key foreign goods are not free to enter the country (or cost more), prices tend to increase, leading to increased level of inflation.
  • Inefficiency – where there is protection against foreign competition, the industries (sectors) enjoying this shade tend to be slow in instituting efficiency enhancing systems (such as paying due regard to research and development) with a view to meeting international quality standards specifications. Kenya, for instance, cannot achieve its 2020 industrialization dream without efficiency (in both public and private sectors).

(Visited 38 times, 1 visits today)
Share this:

Leave a Reply