Arguments for and against Protectionism:

How Protection can be justified:

Basic Reason:
A persistent deficit on BOP due to high level of imports causes demand deficiency negatively
influencing GDP growth rate and rate of employment. Apart from this persistent deficits will cause
continuous exchange rate weakening and depletion of foreign currency reserves and will also involve
major unpopular policy changes. Therefore discouraging imports with the help of trade barriers is
indispensable.

Infant Industries:
Infant industries also referred as Sunrise industries are industries which are new in the field, market
share being small their per unit cost of production is high. With a higher per unit cost these firms are
forced to sell at a higher price and hence unable to compete imports and face threat of a decline.
Government’s support comes when it believes that these industries may become large in the future
and will help substitute imports. Govt. therefore will either tax imports or will provide subsidies to
local firms.

Sunset Industries:
Sunset industries are industries which are in the phase of diseconomies in their longer run which
means per unit cost rising due to managerial and labour inefficiencies. Rising per unit cost forces them
to charge higher prices for their product and hence lose ground against imports. These industries are
large industries contributing to GDP considerably and providing employment to thousands of people.
Government knows that if these industries decline GDP growth rate will slow down and there will be
job losses. Government therefore supports these industries either by discouraging imports or
providing subsidies to these firms.

To avoid dumping:
In international trade, the export by a country of a product at a price that is lower in the foreign
market than the price charged in the domestic market because of export subsidies provided by the
govt. is regarded as dumping. As dumping usually involves substantial export volumes of the product,
it often has the effect of endangering the financial viability of manufacturers or producers of the
product in the importing nation. Dumping is also a colloquial term that refers to the act of offloading a
stock with little regard for its price.

Since dumping is regarded as anti-competitive practice and will have negative influence on the
industries of importing country therefore to discourage govt. imposes anti-dumping duties.

Diversification:
Diversification is important for every country because demand and supply patterns keep on changing.
Demand for the good a country produces may fall or it may lose its comparative cost advantage. There
will be loss of exports or increase in imports as a result. So it is important to diversify to avoid over
specialization. However in the stage of diversification cheaper imports act as a threat and must be
discouraged.

Strategic Industries:
Strategic industries are those which are very producing goods or services of very important nature.
These goods or services must be produced domestically because a country do not want to rely on
external sources. For instance for defense equipment country would not want to rely on external
sources because they cannot take the risk of delayed supply or supply declined. Therefore every
country would find it better to produce important goods and services by domestic industries. So if
cheaper imports threaten the survival domestic strategic industry it must be discouraged with the
help of trade barriers.

Arguments against Protectionism:

Local Monopolies:
Discouraging imports will develop and protect local monopolies and oligopolies. Lack of competition
will lead to consumer exploitation and exploitation of other stakeholders. Therefore to promote
competition and to enjoy advantages of highly competitive market imports should not be
discouraged.
Standard of Living:
Discouraging imports will sometimes mean that the consumers are forced to avoid a lower priced
higher quality imported good for higher priced lower quality local good, negatively influencing
standard of living.

Infant Industry:
Economic theory suggests that cost efficiency is the outcome of competition. When a firm faces
competition from other firms, in order to survive, reducing per unit cost is unavoidable. Firm
therefore seriously focuses on cost cutting and hence ensures its survival, profitability and growth. If
infant industry would be kept away from competition it would not be able to achieve required cost
efficiency even in the long run.

A good example of this happening is Automobile Industry of Pakistan, which is being protected
against imports for almost 25 years but the industry would not survive a moment if Automobile
imports are freed from barriers because their per unit cost of production is higher and they charge
undue higher prices for their output.

Administrative Controls:
To apply administrative controls such as barriers on imports or to providing subsidies to local firms,
govt. will have to set up different public sector organizations or departments to look after this. For
instance Customs department in Pakistan is responsible for levying duties on imports or Finance
ministry will decide who to subsidies. Too many administrative controls will lead to corruption which
will make administrative controls ineffective and government’s scarce resources will be wasted. For
instance if govt. provides subsidies to a local firm to protect it against cheaper imports apparently but
behind the scene corrupt govt. officials are actually favoring their allies and general public know
nothing about this.

Misallocation of resources:
When a country uses trade barriers to discourage imports to protect local firms, it is a clear evidence
that local firms as compared to foreign firms are cost inefficient. So when production of a good is
being diverted towards an inefficient producer it is definitely misallocation of resources. More per
unit resource will be utilized to produce a good which could have been produced at a lower per unit of
resource and scarce resources will be wasted.

Response of trade partners:

This is quite simple to understand that when one country will impose restrictions on imports of other
countries they will retaliate by doing the same. When only one country apply import controls it will
benefit but when all countries will follow the same policy exports of every country will fall and
resultant impact of protection will be zero. Moreover all benefits of specialization will be lost when
the same firms will produce for home market only because export markets are lost now because of
import restrictions. Discouraging imports will not have positive influence on BOP because exports
have also been discouraged.

Increased cost of production:

Trade barriers will increase the cost of imported factors of production which may lead to imported
inflation. On the export side country may lose its comparative cost advantage because of expensive
imported FOPs.

Sunset Industry:
Economic theory suggests that any support to Sunset industries should be temporary. Under this
temporary support if the industry revives itself then its good otherwise govt. should withdraw its
support. Industrial decline will negatively influence GDP and employment in short run but soon
resources will find their way towards more efficient industries. Industries, where increase in GDP and
employment will be more than Sunset industries.

Free Trade:
Fruits of free trade:

 Free trade will increase production and productivity because of bigger markets available.
 Consumers will benefit from higher quality and lower prices, cost of living will fall.
 Product innovation on the part of firms to increase their global market share will increase and
they will spend more on research and development.
 More production means more jobs on better salaries and higher GDP.
 Trade and bilateral relations will improve because when trade is at stake, countries will avoid
unnecessary conflicts and political ties will improve.

World Trade Organization (WTO):

The World Trade Organization (WTO) is the only international organization dealing with the global
rules of trade between nations. Its main function is to ensure that trade flows as smoothly,
predictably and freely as possible. Essentially, the WTO is a place where member governments go, to
try to sort out the trade problems they face with each other. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading nations.