7.2.4

Arguments Against Protectionism

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Arguments Against Protectionism

Protectionism can have some indirect negative consequences on different workers and industries.

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Higher prices and less choice

  • Domestic consumers may have to pay more for goods in the protected industry. They have less to spend in other industries, which could lead to job losses.
    • So these low-wage workers pay higher prices for basic necessities and, as such, their money can buy fewer goods.
  • In the US, textile and apparel protectionism adds to the costs of imports. So consumers end up paying billions of dollars more for clothing each year.
  • Consumers also have less choice over what to consume.
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Higher input costs

  • If the protected product is an input, it will raise the costs of production of the industry that uses the input. This makes domestic firms less competitive if they are hoping to export.
  • This could also give rise to cost-push inflation.
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Risk of retaliation

  • Countries often retaliate against tariffs and this can reduce a country's exports.
  • Exports are a component of aggregate demand (AD), so AD could fall.
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X-inefficiency

  • Protectionism could lead to long term dependency on protection. This is because protectionism breeds inefficiencies because firms are protected from foreign competition.
    • E.g. 60% of EU budget is spent on subsidising agriculture through the Common Agricultural Policy, although agriculture is worth less than 15% of EU GDP.

Government Control of Globalisation - Protectionism

Using trade protectionism and adding tariffs to imports from other countries makes their goods look more expensive and so limits trade with these countries. This limits the spread of globalisation.

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Banana wars

  • A well-known example of protectionism was the ‘banana wars’ of the early 2000s.
  • The EU had a trade deal with the Caribbean which set a quota of how many bananas each country could sell to Europe. The idea was that this would help these countries to develop without needing aid.
  • But this was an act of protectionism because it stopped the free trade of bananas and made bananas from outside of the Caribbean look more expensive.
  • The US complained to the World Trade Organisation that this was limiting global trade and stopping their bananas from selling in Europe.
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Infant industries

  • Infant industries are industries that are in the early stages of development in the domestic country.
  • Adding tariffs to foreign goods can help infant industries create domestic jobs and let an industry develop.
  • The USA did this with lots of iron and steel industries in the late 1800s.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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