PROTECTIONISM
The theory
of International Trade based on comparative costs stresses that the benefits of
International Trade can be held by the trading countries only when the trade is
free from all restrictions. But it was
realised soon that the free trade, no doubt, advantageous for developed
countries but it is highly injurious for the developing countries due to the
various reasons. Free trade policy has been generally conducted by the
developing countries and they have utilised the restricted trade policy for the
purpose of providing protection to the local economy against the competition of
developed and technically advanced countries.
Arguments
for Protection:
The
following arguments are extended in favour of protection:
1.
Infant Industry Argument:
This
argument was given by a German economist Friedrich List, according to whom
newly emerging German Industries (infant industries) were in need of protection
against Britain’s develop and establish industries.
2.
Diversification of Industry Argument:
Again, List
was of the opinion that the local Industries could be protected and country may
not depend on a few industries. Otherwise it will have to depend on other
countries which will neither be socially nor economically and nor politically
advisable.
3.
Employment Argument:
If the
existing local industries are exposed to foreign competition they will be
ruined and thereby rate of unemployment will increase. Protection establishes
and enhances employment opportunities.
4.
Conservation of Resources Argument:
Carey, Patten
and Jevons argued that in absence of restrictions free trade transfers the
resources from a particular country to other countries. Moreover, the exporter
of raw material loses the producers profits. Protection consumes the local
natural and mineral resources.
5.
Defence Argument:
Defence is
better than opulence or guns are better than butter. These are the arguments in
favour of defence protection provides the opportunity to develop the defence
industries and to curtail dependence on other countries. Free trade thrusts
overdependence.
6.
Revenue Argument:
Protection
import duties may be the source of revenues for the government. Custom duties
have been fairly productive all over the world.
7.
Key Industry Argument:
Efforts for
economic development will be useless in the absence of basic or key industries.
For example, no economic and structural development is possible without
development of iron and steel industry. Since basic industries are crucial and
strategic therefore, they must be provided with necessary protection.
8.
Balance of Payment Argument:
An adverse
balance of payments is a root cause of various economic problems, therefore,
check on imports, through different protective tariffs, becomes necessary to
rectify adverse balance of payments.
Forms
of Restrictions:
Protectionism
may take various forms which can be discussed in terms of trade barriers as
under:
1.
Import Prohibition:
Sometimes,
certain commodities are prohibited to import by law and if they are allowed to
import, they are allowed under certain conditions. Sometimes, some countries
curtail imports by way of refusing to export some raw materials unless they are
processed at home.
2.
Exchange Control:
It is a
system of government through which it regulates the foreign exchange. All the
purchasing and selling of foreign currencies are handled by the government.
Through exchange control, the government can rectify an adverse balance of
payments by restricting and curtailing imports. Under this system, a limited
amount of foreign exchange is permitted to consume on imports
3.
Import Licences:
Under the
system, importers are only permitted foreign currency to pay for imports
sanctioned by the monetary authorities. In such cases, licences have to be
obtained before goods can be imported. Similarly, where imports of certain
goods are subject to quota restrictions such goods can be imported only by
importers who have obtained the necessary import licences.
4.
Import Monopolies:
The
government, sometimes, can make a monopoly to import some goods. It is termed
as “State Monopoly” for imports.
5.
Quota System:
With
reference to international trade, quotas have been used as an alternative to
tariffs as a means of restricting imports. A country may allot quotas to its
suppliers, by fixing a maximum amount of commodity can be imported during a period.
There are
two kinds of quota: Custom quota and Import quotas. Custom quota allows a
certain amount of a commodity to import at a favourable duty and beyond this,
normal duty is charged on the other. Import quotas are more serious in nature.
According to this type of quotas, an arbitrary limit of import is fixed beyond
which imports during a time are not allowed at all.
Advantages
of Quotas (on Imports):
The quota
system is advantageous because:
(a) It is visible
in nature.
(b) Home
manufacturers are aware of the amount to be imported and can
regulate their production accordingly.
(c) Quotas
are less resented.
(d) This
can be used as bargaining counters in trade negotiations.
Disadvantages
of Quotas:
The quota
system is also subject to following the demerits:
(a) Home
market becomes isolated and thereby is not benefited by price
oscillation outside the country.
(b) Government
loses its revenues.
(c) Quota
system concentrates undue power in the hands of
administrative officials.
6.
Protective Tariffs:
Tariff is a
schedule of charges for goods and services. But more correctly, a system of
duties imposed on goods imported (or exported) either for revenue purposes of
for protection of both. It is also defined as the tax levied on the imports.
The tariff
can be classified into two: Prohibitive tariffs and non-prohibitive tariffs.
The first type is so light that it completely discourages any import. The
second type injures but not kills off the trade.
Effects
of Tariffs:
Tariff, no doubt,
is an important tool of commercial policy with which a government can regulates
its balance of payments in favour through controlling imports. It is a double
edged weapon; on the one hand it restricts the consumption based on imports and
on the other, it can ship the use of resources from one to the other. The
effect of tariffs is to change the relative prices of goods and services and to
change the relative prices of factors of productions. Have a glance over the
diagram:
You know
that the tariff of PPI is imposed. Since at OP price the imports
have infinite elasticity, they will have no effect of tariff. But it will raise
the price from OP to OPII in domestic market. At OPI
price, foreign supply line is shifted to PHH and imports are reduced from QIQIII
to QIQII (=NR).
Consequently, the domestic production increased from OQ to OQI
(or by QQI).
Tariffs
bring about the following effects:
(a)
Consumption Effect:
Tariffs
curtail consumption through increase in price. When tariffs are imposed, price
increased to the extent of tariffs amount. In the preceding diagram, imposition
of tariff by PPI decreases consumption from OQIII to OQII.
(b)
Redistribution effect:
Imposition
of tariffs reduces consumers’ surplus because it increases prices.
Consequently, some income is transferred from consumers to the producers and to
the income is redistributed. In the diagram this effect is illustrated by
quadrilateral PTNPI.
(c)
Protective effect:
As a result
of tariffs imposition, prices of imports become high so the imports are
curtailed. Decrease in imports provides protection to the local producers.
Protective effect increases domestic output as it is shown from OQ to OQI.
(d)
Revenue effect:
If the rate
of tariff is multiplied by the total quantity imported during a time,
government revenue can be calculated. Revenue effect is given in the diagram
equal to NSFR.
Source: Saeed Ahmed Siddiqui
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