Thursday, July 12, 2012

Eco Challenge

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Protection can be defined as any type of government action that has the effect of giving domestic producers an artificial advantage over foreign competitors. The main protectionist measures include tariffs, import quotas and subsidies.

Despite the economic arguments in favour of free trade, historically most countries have tended to impose at least some forms of protection to assist local producers and protect them from overseas competition.

There are a number of arguments that have been put forward to justify why countries impose protectionist barriers to trade, including the need to assist infant industries, protecting industries from overseas firms dumping goods, reducing unemployment and arguments for self-sufficiency in certain items.

Infant industries

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New industries generally face many difficulties and risks in their early years. They usually start out on a small scale, with costs that are relatively higher than those of the more established firms competing in the international arena. It is argued that these “infant industries” may need protection in the short run to enable them to expand their scale and reduce their costs of production so that they can compete with the rest of the world.

For this argument to be valid the protection should only able temporary, otherwise there would be no real incentive for the industry to reach a level of efficiency that would enable it to compete without protection. This means that temporary assistance should only be given to industries that have a good chance of achieving some comparative advantage in the long run and are willing to make the effort to achieve this.

Prevention of dumping

Dumping occurs when foreign firms attempt to sell their goods in another country’s market at unrealistically low prices. The practice of dumping may be used to dispose of large surpluses or to establish a market position in another country. These low prices are usually only of a temporary nature but can harm domestic producers. Local industry that could normally compete with such foreign producers may be forced out of business, causing a loss in a country’s productive capacity and higher unemployment.

Protection of domestic employment

One of the most popular arguments in favour of protection is that it saves local jobs. If local producers are protected from competition with cheaper foreign imports, the demand for local goods will e greater and this will create more domestic employment. This argument would sound even more convincing during times or recession when unemployment is rising.

However, there is little support amongst economists for this argument. Protection will tend to distort the allocation of resources in an economy away from areas of more efficient production towards areas of less efficient production. In the long run, this is likely to lead to higher levels of unemployment. On the other hand, by phasing out protection it is hoped that better and more lasting jobs will be created in other sectors within the economy.

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