PROTECTIONISM

Assess the appropriateness of using protectionism to help a small country tackle those
challenges relative to a large country. [15]

Introduction:

Protectionism refers to the partial or complete protection of domestic industries from foreign
competition in domestic markets. These include both tariff and non-tariff barriers. To assess the
appropriateness of protectionism in tackling the challenges of free trade, the following criteria should
be considered i) effectiveness in solving the problem and ii) solving the problem at minimal trade-off of
another objective. While protectionism can address the challenges mentioned in (a), it tackles them
better in the context of a large / less open economy than a small / open country.

Body:
 Protectionism to develop infant industries with potential CA
Protectionism makes imported goods relatively more expensive causing residents to turn towards
domestic substitutes produced by the infant industry. In this way, the domestic infant industry is
able to produce on a big scale and enjoy EOS. Once it has reached this stage, protectionism can
be removed and the infant industry can compete and survive foreign competition on its own.
This argument is more applicable to large countries like India rather than small countries since
the former as a large enough market for the domestic infant industry to enjoy EOS. It will not
work for small countries. Even then, it may also not work for large countries because
protectionism tends to promote inefficiency and the infant industry never grows up.
 Protectionism promotes macro stability by enabling a country to rely less on trade partners.
o When protectionism is practiced, trade will be reduced. This reduces the country’s
exposure to AD shocks from falling X due to recession in trade partners’ countries or AS
shocks caused by rise in prices of imported raw materials.
o This advantage will likely benefit large countries like US / Australia more due to the large
domestic market where Cd takes up a large proportion of the GDP. This provides a viable
alternative growth engine to these countries and insulates them from the volatility of world
markets to a certain extent. However, it will be difficult for a small country like Sg to do the
same given its small domestic market. Cd will not be enough to replace X as a driver of
actual growth it will have to depend on trade partners for its export markets as long as it
desires high economic growth.
o Moreover, protectionism will also come at the expense of current society’s welfare due to
the deadweight loss incurred (explain using the tariff diagram). While this applies to both
large and small countries, this trade off will be very high for a small economy with no
natural resources. These countries will have to weigh between adopting an open trade
policy which enables them to increase welfare plus tap on the world market for export and
subjecting themselves to the volatility. Rather than suffer welfare loss and decreases in
growth rate, the problem of volatility can be better addressed by diversifying and forming
FTAs with different countries.

 Protectionism can slow down structural unemployment brought about by trade

o Protectionism slows down the decline of import-competing industries and those that have
lost their comparative advantage. It provides time for these workers to be retrained and
reallocated to other growing industries. How long this takes will in turn depends on the
 cost and extent of retraining that is required and the mind sets of both employers /
workers.
o In reality, protectionism may tend to slow down a country’s restructuring process,
depriving growing industries of resources that can be reallocated to them. This will have a
more significant adverse impact on a small, resource-poor and open country like Sg.
With these workers structurally unemployed, growing industries will face resource
constraint leading to rise in factor prices (e.g. wages) and possible cost-push inflation.
Export competitiveness of these industries will also be compromised and hence growth.
While the same can be said of large countries, however, these countries can rely on other
engines of growth. In addition, the resource constraint due to slowing down of
restructuring may also be less severe.
o Instead of using protectionism to overcome the structural unemployment brought about by
trade, government should adopt supply –side policies targeted at provision of training and
upgrading of skills.

 Protectionism reduces a country’s exposure to unfair competition like dumping

o Protectionism ensures that import competing industries are not subject to unfair
competition and the foreign firms will not gain a foothold in the country.
o If indeed foreign countries dump their products, such protectionism is justifiable.
However, regardless of small / large economies, protectionism itself leads to a fall in total
trade volume and hence national income and growth of countries.

Conclusion:

Protectionism is likely to benefit a large country more since its size enables the country to have an
alternative internal engine of growth. However, as protectionism can be hard to prove, this is often
used as a disguise to protect inefficient industries. The usefulness of protectionism to a small country
tends to be limited as its economic growth and welfare may be too greatly sacrificed. While
protectionism may be able to address the challenges that arise from openness to trade in the short-
term, the welfare of countries (whether big or small) using it will be reduced due to the possible
deadweight loss incurred. Hence, both big and small countries should consider adopting supply side
policies. This will ensure that it exports goods that it has comparative advantage in and that new niche
areas of growth are identified and developed and a nimble and quality workforce can be developed.
Beyond trade, the government can also put in place policies to attract FDI to overcome the restraints
faced by a small country.

Level Descriptors Marks

s
2  Shows ability to link protectionism to the challenges in (a) but the 6-8
arguments are undeveloped
 Some faint attempts to compare the benefits of protectionism between
the small / big countries
 Some use of relevant e.g.s but they may be undeveloped

3  Evidence of depth of analysis in comparing the benefits of 9 - 11

protectionism between the small / big countries
 Good use of relevant examples
 Clear links are made to the macro goals and shows understanding of
the resultant welfare loss

E1 Mainly unexplained judgement 1-2

E2 Judgement based on analysis 3-4
 Question 6
6 Economists warn of the rising waves of protectionism around the world
although some governments are opening markets and improving
competitiveness.

(a) Explain why protectionism exists. [10]

Suggested Answer Model (a)

 Definition of protectionism: Restriction of imports.

Protectionism is a deliberate government policy
to erect trade barriers in order to shield domestic
industries from foreign competition.
 Aim of protection: The aim of protectionism is to
switch expenditure, both domestic and foreign to
the output of goods and services of the domestic
economy.

Barriers on the movement of goods and services between countries.

Types of barriers Explain & comments on reasons for

restrictions of free trade
Overt measures
Covert measures ■ protect infant industry

In real world, countries impose trade

restrictions e.g. subsidies, tariffs & quotas ■ enable sunset industry to decline
gradually/protect employment
Define subsidies

Explain how subsidies work

Price Sd
Conclusion
Governments may want to restrict imports
Sd’ to reduce some of the costs brought about
by free trade. However, such protection
measures result in a loss of welfare for
consumers. Domestic consumers are
Pw forced to buy from high-cost domestic
industries, rather than from low-cost
foreign industries. They end up with fewer
Dd consumer choices and pay higher prices.
-
0 Qd Qs’ Qs Output
Essay 6
"Despite the benefits of globalization, developed economies need protectionist
measures to deal with its challenges."
Discuss whether you agree with the view. (25m)
Suggested answer:
Introduction
Globalisation refers to the increasing integration of national economies in terms of trade,
financial flows, ideas, information and technology. It has fused individual national markets,
increased the ratio of trade to GDP for many countries and caused a sustained increase in
capital and labour flows between counties.
Development 1

Benefits of globalization (Give 2)

Globalisation can lead to improvements in efficiency and gains in economic welfare:
1) Domestic firms can export to a wider market. This enables producers and consumers
to reap the benefits of economies of scale. Globalisation enables increased
specialisation of production according to theory of CA which enables firms to reap
EOS leading to a fall in average costs. This enhances productive efficiency which
can be translated in the form of lower prices for final goods and services.
2) Globalization leads to an increase in the volume of trade. Small developed
economies such as Singapore is able to tap on a larger market (in the developing
economies e.g. China and India) and hence this will lead to an increase in export
revenue and hence AD and boosting economic growth in the country.

Challenges of globalization (Give 2)

1)Increases structural unemployment
There are gains from free trade as countries specialized in their areas of comparative
advantage. However, developed countries have increasingly lost their comparative
advantage in not only the primary industries, but also in the manufacturing sectors as well.
Firms in developed countries find it difficult to compete with firms in developing countries
who are facing lower production costs (e.g. lower wages due to abundance of labor). As a
result, a lot of firms and investors in developed countries have chosen to relocate their
production to low cost developing countries. Hence, there is a fall in demand for labor in the
sunset industries and they are unable to work in the sunrise industries due to a mismatch of
skills.
3)Result in a trade deficit
Globalization can result in a current account deficit for the developed economies. This is
because developing countries like China is able to price their goods at a very cheap price
due to its abundance of cheap labor. Hence, developed countries like the US is buying a lot
of China’s exports and thus the huge import expenditure has caused the US to land itself
into a huge current account deficit.

Development 2
Thesis: Developed economies need protectionist measures to overcome the challenges
faced by globalization
1)Protecting employment

A tariff is a tax on imports. It will increase the unit cost of production and reduces the world
supply, resulting in an increase in the price of imports from P1 to P2. The intent of the trade
barriers is to switch expenditure to domestically produced substitutes. The extent of the rise
in domestic production is dependent on the PES of the good. The more price elastic the
supply of good is, the more significant the increase in domestic production.
An increase in the domestic care production from Q1 to Q2 will mean that firms will need to
engage more factors of production. This will increase the demand for the workers from D1 to
D2, employment increases from N1 to N2 and increase the wages of the workers in the
industry from W1 to W2. The extent of the increase in employment however, depends on the
PES of labour. The more responsive the workers are to wage, the more employment in the
industry will increase.
Hence, a tariff here will slow down the decline of the sunset industry and the workers will
have more time to go for retraining so that they are equipped with the relevant skills to find
employment in the sunrise industries.
2) Correcting a trade deficit
Another argument put forward for protectionism is to correct trade deficit where the total
value of import of goods exceeds the total value of exports of goods. A trade deficit is often
considered to be undesirable because it slows down economic growth of a country.

A tariff raises the price of imports and reduces the quantity demanded of imports.

Domestic consumers switch their consumption towards domestically produced goods,

increasing domestic consumption. Hence, domestic consumption increase which raises the
aggregate demand and helps to promote actual economic growth. National income, output,
employment by a multiplied amount
Anti-Thesis: Developed economies do not need protectionist measures because it brings
about drawbacks and in turn reduces the benefits that can be reaped from globalization.
1) World K effect

A country’s imposition of tariff leads to a reduction of imports which are other countries’
exports.A reduction of these countries’ exports will reduce the ‘injections’ into the world
economy and thus will lead to a reduction in demand for the first country’s export and this
will undo the benefits of the tariff.

The fall in demand for exports due to the world multiplier effect may offset the rise in the fall
in consumption on domestically produced goods and investment due to the tariff with the
result that AD does not rise at all. Hence, government’s attempt to tackle negative growth or
unemployment may be rendered less effective.

Conclusion
In conclusion, globalization can bring about both costs and benefits to a country. However,
protectionist measures is a short term measure which does not address the root cause of the
challenges faced by the developed economies, hence I disagree to a large extent that
developed countries need to adopt protectionist measures to deal with the challenges.
Criterion: Dealing with the root cause of the problem
Protectionist measures like tariffs is only going to be effective in the short run because it can
help to slow down the decline of the industry and ensure that workers are able to equip with
them the necessary skills. However, it is not going to solve the structural factors which are
causing the developed economies to be losing out.
Therefore to deal with the challenges, there is a need for developed economies to develop
new niche markets and comparative advantage. For example, shifting away from low value
added industries to more high value added industries since developed economies are
equipped with better technology and equipment. For instance, Singapore’s policies have
been geared towards supply-side with the focus of improving our labor productivity and
hence competitiveness of our goods and services. Hence, supply-side policies like education
and retraining will greatly help to reduce production costs and increase the quality of our
goods so as to place our products at a competitive edge in the global markets and be able to
compete with low cost countries like China and India.
Level Knowledge, Comprehension, Application & Analysis Marks
3 For a well-analysed and balanced discussion that addresses both sides of the 15-21
arguments of the protectionism in view of the challenges faced by the developed
economies.
2 Answers lacking in scope. (e.g. Only addresses either the arguments for/against 9-14
protectionism) or an answer that is lacking in rigorous analysis.
1 For a description of the costs and benefits of globalization. 1-8
Evaluation Marks
E2 Evaluative judgement supported by appropriate analysis 3-4
E1 Unexplained judgement 1-2
Protectionism is short-sighted and narrow-minded. As such, free trade is often
advocated to grow an economy.
(a) Explain how protectionism can be regarded as ‘short-sighted and narrow-minded’.
[10]
(b) Discuss the extent to which free trade should be advocated over protectionism to
grow the economy. [15]

(a)
Protectionist measures are policies which distort market forces in order to give a competitive
advantage to the domestic industries of an economy. Protectionism can be regarded as
short-sighted as it focuses on the immediate benefits that can be reaped and disregards the
potential disadvantages it may bring about in the long term or does not solve the root cause
of the problem and hence the problem will continue to persist in the future once protectionist
measures are removed.
The protection of declining industries against foreign competition can be regarded as short-
sighted. For declining industries, they are producing products which are out-dated or
adopting technology that have lagged behind foreign competitors, thereby making their
products less competitive in terms of price or quality. This could cause some domestic
industries to lose their comparative advantage and face the danger of closing down. While
protectionism reduces the job losses in declining industries, such protection will perpetuate
domestic inefficiency. Should government remove the protection, domestic industries may
face the danger of collapse and unemployment may result.
Protectionist measures can be regarded as narrow-minded as it focuses on helping certain
industries at the expense of other industries in the economy. Government imposing
protectionism for certain industries in the economy could invite retaliation from their trading
partners, resulting in an overall decreased in international trade. Thus, any gain in
employment for some industries in the domestic country may be offset by a loss of
employment in other industries. This reduces domestic exports and may hurt export-related
industries in the country.
Furthermore, protectionist measures in the form of subsidies can also be short-sighted.
While such subsidies enables the goods to be more price competitive in the market and
hence increasing country’s export to the world, large amount of government funds are being
channelled into the industry. This puts a drain on the government budget and trade-off
between spending money to protect the industries vs spending on other developmental
needs of country e.g. healthcare, national defence and education.
In conclusion, protectionism can be regarded as ‘short-sighted and narrow-minded’ since it
focus more on the immediate benefits to the industry where protectionism is imposed and
neglected the future cost as well as detrimental impacts on unprotected industries in the
country.

Knowledge, Understanding, Application & Analysis

L3 Developed explanation on how protectionism can be both short-sighted and 8-10
narrow-minded, highlighting the immediate benefits, future cost and impact
on unprotected industries.
(b) Discuss the extent to which free trade should be advocated over protectionism to
grow the economy. [15]
Growth of an economy is usually indicated by the increase in real GDP of the country. With
the growth of the economy, the country will be experiencing increasing income levels which
can lead to higher standard of living for the citizens
With free trade, domestic producers are able to exploit economies of scale by selling in more
markets. The production of certain goods such as cars and aircraft are usually subjected to
decreasing average costs as output increases. However the domestic market in some
countries may be too small for domestic producers/industries to fully exploit the economies
of scale. Through free trade, domestic producers will have access to the world markets. The
increase in export revenue will lead to an increase in AD and a multiple increase in NY via
the multiplier process. Domestic country can achieve actual economic growth.
Also with free trade, domestic producers will be exposed to greater competition from
foreigner producers. In order for domestic producers to maintain their competitive
advantage, producers may look to improve their product to reduce the degree of
substitutability by increasing investment into technology or more sophisticated machinery.
The increase in investment will lead to an increase in AD in the short run and hence a
multiple increase in NY. Over time, this is also likely to contribute to the potential growth in
the economy since there is advancement of level of technology in the economy due to the
increase in productive capacity.
Hence free trade can help an economy to achieve both actual and potential growth. If the
country were to be very protectionist, such benefits may not be enjoyed.
However, it is important to note that investment in technology or more sophisticated
machinery requires funding and there could be a time lag before the positive impact can be
observed in the economy.
However, protectionism can sometimes also be adopted by a country to achieve growth.
In some countries, the government might choose to protect infant industries in their country.
Through protectionism, the industry is able to exploit economies of scale over time. The
lowering of their long run average cost enables their products to be more price competitive in
the world market. If this translates to more exports, this will generate increased export
revenue for the domestic country. The increase in X will lead to an increase in AD and hence
a multiple increase in NY via the multiplier process. As a result, the domestic country can
achieve actual economic growth.
Also protectionism can also help the country to achieve growth especially if foreign countries
are ‘dumping’ in the domestic country. Dumping occurs when goods are sold in overseas
markets at a price below marginal cost. The aim is to drive domestic competitors out of the
market with the aim of establishing monopoly power in the future. Hence with government
protection against dumping, domestic producers will be protected against ‘low-cost
dumpers’. The domestic production can continue to contribute to the exports of the country,
contributing to the increase in AD and hence a multiple increase in NY via the multiplier
process. However, dumping is also very difficult to be proven as foreign countries may truly
have a comparative advantage in producing certain goods.
Hence protectionism can help an economy to achieve actual growth.
In conclusion, while free trade should be advocated over protectionism to grow the economy,
it is important to also assess the current situation and stage of development of industries as
government protectionism might be required for short-term.

Knowledge, Understanding, Application & Analysis

L3 Developed discussion on how free trade and protectionism can help an 9-11
economy to achieve growth

L2 Undeveloped discussion on how free trade and protectionism can help 5-8
an economy to achieve growth

Developed explanation on how free trade OR protectionism can help

an economy to achieve growth

L1 Undeveloped explanation on how free trade OR protectionism can 1-4

help an economy to achieve growth

Evaluation
E2 Able to form a judgment on the issue after looking at both sides. For 3-4
e.g., students are able to take into consideration the fact protectionism
can be damaging to an economy in the long run and should only be
adopted under certain circumstances
E1 Able to make some comments on which policy is preferred for growth, 1-2
but statements tend to be generic and superficial