MOTIVES FOR PROTECTIONISM

What is Protectionism?

Protectionism is the practice of following protectionist trade policies. A protectionist trade policy
allows the government of a country to promote domestic producers, and thereby boost
the domestic production of goods and services by imposing tariffs or otherwise limiting foreign
goods and services in the marketplace.

Types of Protectionism

Protectionist policies come in different forms, including:

1. Tariffs

The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of
imported goods in the domestic market, which, consequently, reduces the demand for them.

2. Quotas

Quotas are restrictions on the volume of imports for a particular good or service over a period of
time. Quotas are known as a “non-tariff trade barrier.” A constraint on the supply causes an
increase in the prices of imported goods, reducing the demand in the domestic market.

3. Subsidies

Subsidies are negative taxes or tax credits that are given to domestic producers by the
government. They create a discrepancy between the price faced by consumers and the price
faced by producers.

4. Standardization

The government of a country may require all foreign products to adhere to certain guidelines. For
instance, the UK Governmentmay demand that all imported shoes include a certain proportion of
leather. Standardization measures tend to reduce foreign products in the market.

An economy usually adopts protectionist policies to encourage domestic investment in a specific

industry. For instance, tariffs on the foreign import of shoes would encourage domestic
producers to invest more resources in shoe production.

In addition, nascent domestic shoe producers would not be at risk from established foreign shoe
producers. Although domestic producers are better off, domestic consumers are worse off as a
result of protectionist policies, as they may have to pay higher prices for somewhat inferior
goods or services. Protectionist policies, therefore, tend to be very popular with businesses and
very unpopular with consumers.

Advantages of Protectionism

 More growth opportunities: Protectionism provides local industries with growth

opportunities until they can compete against more experienced firms in the international
market.
 Lower imports: Protectionist policies help reduce import levels and allow the country to
increase its trade balance.
 More jobs: Higher employment rates result when domestic firms boost their workforce
 Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in
domestic production

Disadvantages of Protectionism

 Stagnation of technological advancements: As domestic producers don’t need to worry

about foreign competition, they have no incentive to innovate or spend resources
on research and development (R&D) of new products.
 Limited choices for consumers: Consumers have access to fewer goods in the market as
a result of limitations on foreign goods.
 Increase in prices (due to lack of competition): Consumers will need to pay more
without seeing any significant improvement in the product.
 Economic isolation: It often leads to political and cultural isolation, which, in turn, leads
to even more economic isolation.

MOTIVES FOR TRADE

Trade is a basic economic concept involving the buying and selling of goods and
services, with compensation paid by a buyer to a seller, or the exchange of goods or services
between parties. Trade can take place within an economy between producers and consumers.

There are very few models of trade that include all five reasons for trade simultaneously.
The reason is that such a model is too complicated to work with. Economists simplify the
world by choosing a model that generally contains just one reason. This does not mean that
economists believe that one reason, or one model, is sufficient to explain all outcomes.
Instead, one must try to understand the world by looking at what a collection of different
models tells us about the same phenomenon. For example, the Ricardian model of trade,
which incorporates differences in technologies between countries, concludes that everyone
benefits from trade, whereas the Heckscher-Ohlin model, which incorporates endowment
differences, concludes that there will be winners and losers from trade. Change the basis for
trade and you may change the outcomes from trade.
 The five main reasons international trade takes place are differences in technology,
differences in resource endowments, differences in demand, the presence of economies of
scale, and the presence of government policies. Each model of trade generally includes just
one motivation for trade.

Reason for Trade #1: Differences in Technology

Advantageous trade can occur between countries if the countries differ in their
technological abilities to produce goods and services. Technology refers to the techniques used
to turn resources (labor, capital, land) into outputs (goods and services).
Reason for Trade #2: Differences in Resource Endowments

Advantageous trade can occur between countries if the countries differ in their
endowments of resources. Resource endowments refer to the skills and abilities of a country’s
workforce, the natural resources available within its borders (minerals, farmland, etc.), and the
sophistication of its capital stock (machinery, infrastructure, communications systems). 

Reason for Trade #3: Differences in Demand

Advantageous trade can occur between countries if demands or preferences differ
between countries. Individuals in different countries may have different preferences or demands
for various products. For example, the Chinese are likely to demand more rice than Americans,
even if consumers face the same price. Canadians may demand more beer, the Dutch more
wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same
prices.

Reason for Trade #4: Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate advantageous
trade between two countries. Economies of scale refer to a production process in which
production costs fall as the scale of production rises. This feature of production is also known as
“increasing returns to scale.”

Reason for Trade #5: Existence of Government Policies

Government tax and subsidy programs alter the prices charged for goods and services.
These changes can be sufficient to generate advantages in production of certain products. In
these circumstances, advantageous trade may arise solely due to differences in government
policies across countries.

What are the positive effects of trade?

-Trade is critical to America's prosperity fueling economic growth, supporting good jobs at
home, raising living standards and helping Americans provide for their families with affordable
goods and services.

-Countries that are open to international trade tend to grow faster, innovate, improve productivity
and provide higher income and more opportunities to their people. Open trade also benefits
lower-income households by offering consumers more affordable goods and services.
What are the negative effects of trade?
Free trade can and has produced many negative effects, in particular deplorable working
conditions, job loss, economic damage to some countries, and environmental damage globally.
From an economic standpoint, international trade could increase the country's debt when the
number of imports exceeds the amount of exports. Thus, to prevent possible losses due to
international trade, a country must have a good financial management system.

CONCLUSION
In conclusion it can be said that, international trade leads to economic growth provided
the policy measures and economic infrastructure are accommodative enough to cope with the
changes in social and financial scenario that result from it. In order to face the cross border
competition challenges, a well-functioning, national competition regime is insufficient.
International trade open up the opportunity for develop countries whereby it increases their
capacity to produce and acquire goods. It should however be controlled so as to avoid the closure
of some local companies.