TRADE RESTRICTIONS/PROTECTIONISM

TRADE RESTRICTIONS/PROTECTIONISM

The theory of comparative advantage advocates the gains from free trade and specialisation.in practice however, many governments impose barriers to trade this now refers to the implementation of policies which restrict free flow of goods and services internationally.

It also refers to imposition of measures aimed at restricting trade among countries.

METHODS/FORMS OF PROTECTIONISM

By imposing tariffs: these are taxes charged on imports to make them expensive hence discouraging consumption in the local market.

-The tariffs can be in form of custom duties (import duties). This is a source of revenue to the government although it is used to discourage imports.

-A specific tariff is levied on commodities according to quantities purchased ie a fixed tax per unit of goods, compound tariff is fixed tax combining both the advolerm and specific tariff, while Advalorem tariff is charged on goods according to their value.

2.Non tariff barriers-this are more problematic this are measures designed to restrict imports or artificially boost exports these barriers may take the following forms;

  1. Quotas-this are quantitative limits placed on importation of specified commodities they may be set on value/volume of imports. under quota system, any increase in domestic demand is expected to be satsisfied increasing production locally a good example is of embargo where we have zero quota.
  2. Foreign exchange control-the government can therefore make acquisition of foreign exchange more difficult to restrict international trade.
  3. Voluntary export restrains(VERS)-this are voluntary imposed limits a government of an exporting country on the exports of a certain commodity aimed at forestalling official protective action on part of the importing country.eg japan has entered into a number of VERS with the USA and EU countries relating to the export of its cars.
  4. Bureaucratic export procedures-this involves imposition of complex and time consuming bureaucratic procedures for goods entering a country  which may increase the difficulty and cost of exporting.
  5. Product standard specifications-imports can be restricted on basis that they have not met quality standards.health and safety regulations can be used to limit imports on standard goods.
  6. Subsidies-this is an indirect measure providing protection from overseas producers making domestic products more attractive relative to imports.
  7. Moral persuasion-the government appeals to importers and exporters to willfully restrict importation/exportation of a certain commodity.
  8. Embargoes-this is an official order that forbids buying/selling of a commodity.it is usualy established for political rather than for economic reasons.

ARGUMENTS /REASONS FOR PROTECTION

  1. Revenue argument-it is a source of revenue for state mainly through tariffs.
  2. Infant industy argument-they are protected in the short run.
  3. Declining industy argument-without dealing with this ,industries might collapse leading to sudden mass unemployment.
  4. The dumping argument/discourage dumping-this is the practice of selling abroad at a price lower than charged for same product in domestic market.it has a short term benefits for countries receiving  the cheaper commodities, the longer term consequences may be a reduction in domestic output and employment this is because it kills small industries in the less developed countries where the cheap goods have been dumped the developed nations because the consumers will automatically buy this cheap products most developing countries therefore impose high tariffs meant to discourage dumping.
  5. Balance of payment argument-tariffs and quotas may therefore be used in an attempt to restrict imports and improve balance of payment position.
  6. The strategic industy argument-this is a non –economic argument stating that industries produce goods and services which are of strategic importance in times of crises or armed conflict this industries need to be protected since they are very strategic to a country e.g. food production is very important to a country incase of a war,a country has to be in a position to ensure there is enough food in country and this explains why some countries protect their agricultural sectors.
  7. To avoid the dangers of specialization-specialisation may lead to diseconomies of scale e.g. agricultural specialization may contribute  to monoculture, which can  in turn lead to soil erosion, vulnerability to pests and falling agricultural yields in future over specialization can cause a country to be completely vulnerable to certain changes in  demand or to costs and availability of imported raw materials or energy or new inventions, which eliminate its  comparative advantage.
  8. Economic sanctions-a measure taken in respect of some economic activity which has the effect of damaging another countrys economy ie weaken a political economy.
  9. Creation and protection of employment-imposing trade restrictions, imports are discouraged encouraging establishment of local industries to provide commodities that would otherwise have been imported existing industries continue to thrive thereensuring that employed  remain in employment.
  10. To preserve morals and culture- people of different nations interact to carry out trade and people may end up borrowing cultural values of other country the government ban foreign goods which are likely to interfere with culture, moral and health standards of its people e.g. films and literature may erode  cultural practices of society.
  11. To expand domestic market-buying imported goods expand s market for foreign goods government may reverse this introducing protective masures with the aim of encouraging citizens to consume locally produced goods and this will expand market for domestic products due to an increase in demand demand may further stimulate investment.
  12. To facilitate economic recovery-where an economy is facing a recession/depression, the government may adopt protective measures which will stimulate investment this is aimed at achieving economic recovery.

DISADVANTAGES OF TRADE RESTRICTION

  1. Production of low quality products-the protected local industries may end up producing low quality commodities due to lack of competition. The local consumer is therefore denied the chance of enjoying high quality goods which might have otherwise come from the other country.
  2. Overprotection of infant industries-they should be protected to a given period of time and then exposed to competition. Overprotection reduces their competitiveness and the international market is also limited.
  3. Raising the prices of goods-the protected local industries may not enjoy economies of large scale due to their small sizes and they therefore incur high production costs for their products leading to increase in prices of commodities.
  4. Reduction in volume of international trade-free trade facilitates specialization and thus one country will engage in production of the commodities it can produce economically. Protectionism reduces volume of international trade since countries tend to produce everything they need.
  5. Possible emergence of monopolies-protection gives domestic firms monopoly power. Monopolies are notorious for exploiting consumers charging high prices.
  6. Possible retaliation other countries-when a country imposes restrictions on imports from another country,the other country can react similary imposing restrictions on imports from former country. This would be detrimental to both countries.

Less consumer choice-trade restrictions implies that there would be few goods and services that consumers can chose from. This in turn leads to low standards of living for such consumers

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