m

SUBMITTED BY : SHAGUN
VISHWANATH

BALLB[SEMESTER 3]

1020202148

SUBMITTED TO:DR DIGVIJAY KATOCH

ASSOCIATE PROFESOR OF LAW OF CRIMES

HPNLU

ACKNOWLEDGEMENT

1
I would like to state that I m greatly thankful to the guide of my assignment Dr.
Digvijay Katoch(Associate Professor of Law of Economics) and the Himachal
Pradesh National Law University, Shimla for helping me throughout my
venture. I would be indeed failing my duty if I forget to mention my peers,
family and the once who supported me throughout the completion of the
following assignment. If it wasn’t for them I wouldn’t have been able to
complete my assignment. It is solely the result of the combined effort that the
taken up work has been a success.

SHAGUN VISHWANATH

BALLB

3 SEMESTER

1020202148

INTRODUCTION

2
Trade policies refer to the processes and procedure that monitor the movement
of trade in and out of the country. They have been the crucial deciding factor for
any countries success as they can make or break the economy. Moreover they
significantly impact the major economic indicators of the economy such as
GDP, inflation, employment etc.

There are two ways in which countries can strengthen their industries and
progress to industrialization.

 Inward looking trade policies

 Out ward looking trade policies

Both these policies are used to gain economic growth and industrialization
however they are very different in their essence. The policy maker and the
economist have to view various factors and decide which policy would best fit
their own economy.

Countries like India and China have successfully used inward looking trade
policies in the past, while other countries such as South Korea have effectively
followed the outward looking trade policies.

However after the discouraging result of inward looking policy in Latin

America, direction has shifted from inward looking policies that support import
substitution to outward looking policies amongst the less developed countries.

3
INWARD LOOKING POLICIES:

Inward looking trade policies focuses on building and developing domestic

industries. The government is interested in protecting and helping the infant
industries grow and become competitive in the world market by gaining
comparative advantage. This can be achieved when the opportunity cost of
producing that good is lower than other countries. This is achieved through high
trade barriers and high tariffs on imported goods. There is low level of foreign
direct investment into the country

They rely on import substitution industrialization (ISI) is a trade and economic

policy which advocates replacing foreign imports with domestic production. ISI
is based on the premise that a country should attempt to reduce its foreign
dependency through the local production of industrialized products

They provide subsidies to domestic firms and try to build on economies of scale
in order to lower their cost of production. This makes the country more
competitive when the government decides to lower protectionism and enter
foreign markets. India also followed this policy in the 1990’s. Moreover, Japan,
import substitution meant developing strong motor vehicle and consumer
electronics industries which helped them come stronger when they entered the
international market.

Howe ever, the inward looking trade policy failed in the case of Latin America
which discouraged most of the less developed countries from opting towards the
policies.

ADVANTAGES OF INWARD LOOKING POLICIES:

PROTECTION OF INFANT INDUSTRIES

4
Inward policies uses import substitution to protect infant industries from foreign
competition so that large MNC’s don’t run them out of business and they have a
fair chance to grow and develop themselves. This means higher GNP within the
country as more revenue will be generated by the domestic product

SHEILDS ECONOMY FROM EXTERNAL SHOCKS:

It acts as a buffer and shields the economy from external forces. Hence the
country is less volatile towards outside recessions and booms, resulting in stable
and sustainable growth.

REDUCES BALANCE OF PAYMENT DEFICIT:

The inward policies increase tariffs and quotas restricting imports or making it
more expensive for people to buy. Hence they rely more on locally produced
goods rather than foreign goods. This improves the BOP deficit. The local
production gets more competitive and the surplus can be exported further
improving the BOP of the country. 
BUILDS A BASE FOR FUTURE:

Barriers will stay as they are until local firms are able to compete in terms of
size & have acquired the know-how techniques to be productively efficient.
Such as Taiwan, Hong Kong, South Korea & Singapore which once operate
behind protection. Now they are able to produce at competitive costs to the
whole world.

DISADVATAGES OF INWARD LOOKING POLICIES

INEFFICIENT RESOURCE ALLOCATION:

5
The inward policies lead to inefficient resource allocation which results in
welfare loss within the economy. This is because the goods and services
available in the

world market are cheaper still the people are forced to buy them at a higher
price from the domestic market or bare the cost of tariffs imposed.

OPPORUTUNITY COST OF SUBSIDIES:

The resource utilized in providing subsidies to the domestic firm has high
opportunity costs. These resources could’ve been used elsewhere such as in
infrastructure, education, health care or to improve the standards of living.

LOW LEVEL OF FOREIGN DIRECT INVESTMENT

Low level of FDI means slower transfer of technology and knowledge which
restricts growth within the country. Moreover there isles accumulation of capital
stock which leads to slower economic growth.

INCREASE INEFFICIENCY

Domestic firms rarely reach the benefit of economies of scale by allocating

resources efficiently. Also the lack of competition and subsidies of the
government results in slacking and inefficient industries that aren’t able to
develop any comparative advantage. Local producers will tend to slack and
when protections will be removed they won’t be able to compete internationally
and earn the same. So they tend to remain as they are. Removal of protections is
very politically unpopular and may cause resentment. Ruling government may
lose its mandate

CAPITAL COST:

The cost of importing capital machinery is higher due to increased tariffs and
quotas in form of protectionism. This may also result in worsening the BOP

6
deficit rather than improving it. Moreover the shift to capital intensive industry
is done at the loss of labor intensive which result in unemployment

OUTWARDLOOKING TRADE POLICY

These are the opposite of inward trade policies. Countries that implement it
focus on international trade, reducing protection, lifting subsidies and increasing
FDI. Singapore, Taiwan and Hong Kong are successful examples of
implementations of outward policies. They adopted it because of the limited
scope from the small domestic market. They focus on exporting more goods and
services in which they have a comparative advantage and hence more profits
can be made. It focuses on export promotion and developing its competitiveness
in the international market.

The major characteristics of the outward policy hold:

 Deregulation
 Free trade
 Free floating / devaluating exchange rate
 High competiveness
 Increased FDI

ADVANTAGES OF OUTWARD LOOKING POLICIES:

Create employment:

 Many of these factories are located in urban areas & they are labor-intensive. It
provides great employment opportunity to not only people in town but also to
rural migrants. They can develop their small scale industry and export their
products in the foreign markets. As a result, they will witness lesser urban slums
which are disgust to sights. Also it reduces the level of absolute poverty
Influence

7
Aggregate Demand: An export-oriented economy will expect an increase in its
exports over imports, thus creating net exports. As now the country will be
catering to domestic as well as international market the aggregate demand will l
increase. This shall move the AD curve rightward resulting in an increase in real
GDP. Through the multiplier effect, national income & employment will further
increase

Financing capital goods:

 An increase in exports over imports can improve its terms of trade. Terms of
trade means ratio of export prices to import prices. The country need to export
lesser to finance the same amount of imported goods e.g. machineries. Also
there will be lesser danger that the economy will run into foreign exchange &
foreign debt problems

Exploit Economies of Scale:

Since local manufacturers are producing on a large scale to world market, it is

able to significantly exploit EOS. It could be any of the combination of
purchasing EOS, marketing EOS, managerial EOS, technical EOS etc. This will
give the developing countries an advantage on top of its cheap labor. It will be
able to compete easily at international scale with its cost competitiveness. China
is a good example, it has created a chaos in British and US

Learn from rivals:

By competing with multinational companies, local firms will be able to improve

its competitiveness. There will be more efforts put into R&D. Marketing team
will be more aggressive. Also they can learn the unique features of rivals’
product & perhaps make a large improvement over their existing ones to enlarge
market share

8
DISADVATAGES OF OUTWARD LOOKING POLICIES
Environmental degradation:

Developing countries are often accused by Western economies as the major

contributors to global warming, especially China. This is true. Rich Western
economies have already reached the desired level of income. As such living in a
cleaner environment is now their priority. Meanwhile, for poor but booming
countries they have to sacrifice environment at the expense of economic growth
& development. Besides, industrialists in developing economies are not that
well educated. As such their level of environmental awareness is very low
Fall in export prices. 

This is assuming if all developing countries are trying to export their way out
simultaneously. Due to flooding of manufactured goods into the world market,
its prices will be forced to plunge, putting exporters in disadvantage

No protection against economic shocks

 Export-led growth is not without its problems too. Its level of success depends
a lot on the pace of economic growth in rich Western countries. If US is hit by a
recession, then third world countries could be the worst affected. Level of
exports will slump. Unemployment will escalate & the demultiplier effect will
feed into the whole system.

Rich countries erect protectionism.

It’s unlikely that Western manufacturers are able to compete with low cost
Asian economies. Manufacturing sector is labor intensive and labor form a large

portion of total costs. It’s one of the major arguments as to why major Western
economies are shifting their comparative advantage to services sector. Others
which still have manufacturing industry as their core economic activity began to

9
erect unfair protectionism.

With reference to the government policy towards trade, trade strategies may be
broadly divided into two groups, viz., outward oriented and inward oriented
strategies.

An outward oriented or outward looking strategy is one in which trade and

industrial policies do not discriminate between production for the domestic
market and exports, or between purchase of domestic goods and foreign goods.

As Krueger observes, an outward oriented strategy is “not a government decree

that exports are desirable. Rather, it is an entire set of policies oriented toward
encouraging the production of goods and services efficiently.”

An outward oriented strategy is, thus, a neutral strategy and it does not mean an
export oriented or export promotion strategy as is sometimes mistaken, although
such a strategy could pave way for an export- led growth as experienced by
some of the south-east Asian countries.

An outward oriented policy discriminates neither in favour of exports nor is it

against import substitution. It is an open policy Neutrality is its essence.

An inward oriented or inward looking strategy is characterised by a bias of trade

and industrial policies in favour of domestic production as against foreign trade.
As import substitution is the key element of the inward oriented strategy, it is
often described as the ‘import substitution strategy.’

Protection of domestic industries from foreign competition is an essential

feature of the inward oriented strategy. Protection may be accorded by tariffs,
quantitative methods, etc. However, quantities methods and such administrative
restrictions as licensing are very dominant under the inward looking strategy.

10
Nobody doubts today that world competition can only grow in the future.
Competitiveness has thus become the name of the game. That is precisely what
the Europeans have been striving for as they develop their community.

It is what Japan has been so successful in doing with the growing number of
links and agreements it has been developing with virtually all nations
throughout Southeast Asia.

The very concept of a global economy has become conceivable precisely

because of the enormous, and rapidly increasing, number of integrated
manufacturing processes across borders

Production sharing, low cost and high quality goods, as well as free trade
agreements of varying sorts have all become central components of the global
economy. In this context, the ability of firms and countries to compete has
become paramount.

None of these issues is alien to the United States, Canada or Mexico. The three
countries, each for very different reasons, have found themselves confronted
with a new economic reality – the global economy.

They also have a decreasing, or very little, ability to compete successfully with
the European and particularly with Japanese manufacturing giants in
electronics, automobiles and so on. The United States has lost its predominant
share of world trade at the same time total world trade has grown exponentially.

In the mid-1980s Canada proposed and got a free trade agreement with the
United States in order to obtain access to its foremost market.

Mexico, never a significant player in the international economy, shifted from

being a very protected, inward-looking economy to an all-out free-market,

11
export-oriented economy, only to find itself in a series of never-ending trade
disputes with its foremost trading partner, the United States. All three, in spite
of their differences, face the same challenge: becoming successful in the global
economy.

Over the years, both Canada and Mexico have negotiated framework
agreements, antidumping codes and the like, to avoid unnecessary trading
conflicts. Individual firms have gone well beyond what the three governments
have been willing to do, particularly in the case of the United States and
Mexico.

In order to increase price competitiveness, some 500 American firms have

established joint ventures and in-bond production-sharing facilities in Mexico.

The so-called maquiladora programme was started in the 1960s when a series of
changes in the U.S. tax and customs codes made it possible for firms to export
parts and components, have them assembled elsewhere, and then import
them back into the United States, paying duty only on the value added
abroad.

Although some industry had begun to grow and develop since the late 1800s,
e.g., beer and steel, by and large Mexico’s industrialisation began when imports
became unavailable as the war effort in the Allied nations consumed all that was
produced.

Because at the time imports were not available, nobody even suggested the need
to change the then existing trading regime. Substitutions for imports became a
natural and logical response to the international environment. By so doing, a
new domestic constituency was born: one for an inward looking focus of
government policy.

12
Conclusion

A country’s choice of trade policy is not just a matter of selecting free trade or
autarky, for there are many options in between as well. Two key aspects
characterize a trade policy: the degree and type of government intervention, and
the effect of this intervention on inward or outward orientation. The historical
evidence on what kind of trade policy leads to the best performance, although
not entirely unambiguous, does point consistently toward freer, more liberal
trade.

The strongest agreement—by now virtually universal—is with the conclusion

that outward-oriented regimes outperform inward-looking ones. Agreement is
not as strong on how best to achieve outward orientation, whether with less, or
with different kinds of, government intervention. While export expansion
measures alone, even with highly restrictive import regulations, can—in theory
and in fact—shift the trade regime from inward-oriented to outward-looking,
two important qualifications are readily acknowledged.

First, the measures used for imports and exports should be the simplest and
clearest price-related measures available, such as tariffs, taxes, or tax
exemptions for exporters; quantity control measures such as quotas or
government production planning directives are to be avoided. The second, and
perhaps more important, qualification is that intervention should be temporary
and that the government should move consistently toward increased liberality.
Thus, for example, if it starts with a highly restrictive, inward-oriented policy,
its actions on the export side, such as exemptions from import regulations for
exporters, are an acceptable first step, but only a first step.

If we think of liberalization as a process over time, combining a shift from

inward-oriented to outward-looking policies plus a reduction in the degree of
government intervention, the differences in interpretation lessen. Then not only
is a quick leap to free trade a liberalization, but so also is a relatively quick
change in orientation and reduced intervention or a slower two-step movement,
first shifting to outward orientation and then reducing intervention. The main
difference is in the timing and sequencing.

13
However, although the more gradual, two-step liberalization is feasible, it is
difficult to implement without a loss of momentum and credibility in the drive
toward the goal of more liberal trade. The very few countries that have achieved
liberalization in this way and their special circumstances are a testimony to the
difficulty of very gradual liberalization. That a much larger number of countries
have tried gradualism and failed further emphasizes this point. This does not
mean that only a strong, overnight liberalization will work. It does mean that the
period of reform needs to be relatively short, and that the program needs to be
announced in advance and followed as planned.

Some important roles remain for the government. For one, the government is
the arbiter of society’s sometimes competing interests, deciding on the policy
option to be chosen and the path to be followed. For another, it may need to
provide a safety net during the transition to a more liberal regime for those
displaced by the reallocation of economic activity that constitutes adjustment. It
also needs to act as an arbiter in the reciprocal negotiation process of the
multilateral trade negotiations in the GATT. Whatever the criticisms brought
against this process (and there are many), it has had useful results. Finally, in
the more liberal environment, the government retains key responsibilities to
support and work with a market economy based primarily on private initiative:
ensuring a system of just laws and commercial security, a sound
macroeconomic environment, a system of support for the unemployed and for
related assistance during unforeseen shocks, and the provision of infrastructure
where the private sector does not easily operate, particularly in education,
transport, and communications. In the words used so often by foreign investors
—the government should do only as much as is needed to improve the
investment climate, and stop short of the point where its actions undermine it.

14
 CASE STUDY

 Trade protectionism is national policies restricting international

economic trade to alter the balance between imports and goods
manufactured domestically through import quotas, tariffs, taxes,
anti-dumping legislation, and other limitations.
 The primary advantage to countries with higher economic power
and bigger corporations is simply economies of scale, which
infant industries in developing countries often protect against.
 The United States was employing heavy tariffs to protect their
fragile economic system as the economy began to achieve
autonomy after British rule, which proved effective.

 This argument is predicated on the simply fact that buying more

domestically will drive up national production, and that this increased
production will in turn result in a healthier domestic job market.
 Local governments leverage subsidies, tariffs, import quotas, and anti-
dumping policies to maximize strategic capacity domestically, thus
creating jobs.
 A sentiment towards protectionism has developed in the U.S. due to
the jobs argument in view of an imbalanced trade ratio, where more
exports (production and jobs at home) is required to sustain the
ongoing consumption of imports.
 Along similar lines, it is common practice for companies to identify
strategic alliances abroad and send much of the production work to
these locations (outsourcing), motivating governments to bring these
jobs back home.
 Local governments leverage subsidies, tariffs, import quotas, and anti-
dumping policies to maximize strategic capacity domestically, thus
creating jobs

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.

15
Protectionist policies, therefore, tend to be very popular with businesses and
very unpopular with consumers.

In the political debate, trade protectionism has been frequently associated

with keeping and increasing the number of jobs at home. ... Trade protectionists
aim at increasing production at home, either as a result of higher output of local
companies or through higher foreign direct investment.

Previously, the main dispute between supporters and opponents of

protectionism was focused on the discussion of arguments again and for using
tariff as an economic policy instrument. Non-tariff barriers became usual in the
last years and many of them are used by countries as an escape passage in free
trade agreements, since WTO agreements have much weaker restraints on non-
tariff protectionism than on tariff. The supporters of protectionism build their
arguments on the following:

1) An advantage of protectionism is that it keeps the domestic economy rolling.

Since there is a decrease in imports, domestic firms have less competition, and
so are able to continue. The domestic economy will also be strengthened
because unemployment will be down due to the domestic firms and they will be
able to produce and sell more goods with a lot less difficulty, giving firms less
reason to decrease its costs by decreasing its workforce. Those with jobs will
continue to consume while allowing the economy to flow.

2) Protectionism makes domestic firms less competitive in the export market,

as  import barriers raise domestic prices through higher costs for mediocre
inputs this means that export products also become more expensive and
decrease in market share against the international competition.4) Protectionism
permits the new and upcoming firms to work and develop at an acceptable rate,
because they will not be pressured by foreign, more experienced firms. The new

16
firms can grow until they themselves are big enough to compete in international
markets, encouraging positive features for the domestic economy in the future

Q2. What arguments you would advance on behalf of the government if it

decides to end the protectionism in various non strategic US industries?

Of course, protective policy while industry develops domestically is not a cure

all. In Brazil in the 1980’s there were heavy protective policies in place to
defend Brazil’s nascent computer industry from highly evolved competitors
internationally. While this seemed practical, what ended up happening was quite
damaging for Brazil. Technology advanced rapidly, and without strategic
alliances on a global scale, Brazil largely missed out on these advances. This
protectionism seems to have damaged industry prospects on a global level for
Brazil in this scenario.

From a broader and more far-reaching perspective, protectionism as a general

principle has been heavily criticized (even in infant industry situations). The
reason for this is quite simply the significant jump in prosperity as international
trade expanded, and the huge capacity for specialization, economies of scale,
technology sharing, and a host of other advantages that have been a direct result
of free global markets. The problem still remains, however, that this prosperity
is often unregulated and of the greatest benefit to the influential players in
established economies, sometimes at the expense of exploitation of developing
nations (cheaper labor, reduced governmental oversight, etc.). As a result of
this, protecting infant industries can benefit the nation employing them, but
generally with the opportunity cost of global value.

1. Higher Prices

Whether tariffs, quotas, exchange rate controls, or regulations are used, they can
all affect the final price of a product. Tariffs are the most obvious because a tax
is imposed on imported goods. These are paid for largely by the consumer as
importers pass on the majority of this cost.
Other tools such as quotas and regulations restrict the quantity that is made
available. Regulations can completely limit the supply and competition, so
consumers will have to buy from more expensive domestic suppliers. Similarly,
quotas can restrict supply. At the same time, because the supply is limited, the
level of demand will drive up prices.
For instance, if Product A is being imported into Country A at $10, there may
be 1,000 people who wish to buy it. In turn, 1,000 are produced. However,
17
Product A now has a quota limit of 500. The demand has not changed, but the
quantity supplied has.
As a result of the quota, only 500 can enter the market. Yet there is still 1,000
demand. Therefore supply and demand dictate that prices will increase to meet
the new level of supply and eliminate the excess demand.

2. Less Choice
By restricting international competition, there are fewer goods coming into the
country. This means less choice for the average consumer. For instance, the
2012 Skoda Fabia Greenline II is banned from the US. The reason being that it
does not meet US regulations. However, it has been tested and is widely used on
European roads.
At the same time, there are thousands of other products than do not meet certain
standards. Whether those standards are reasonable or not is another question.
Nevertheless, they subsequently reduce the choice to the average consume

Economic Loss
Protectionist policies impose an additional cost and loss on all parties. First of
all, domestic consumers must pay a higher price for goods. At the same time,
importers face a decline in demand, so international jobs are lost. For instance,
the US-China trade war meant that US consumers paid a higher price whilst
demand for Chinese workers is reduced.
So the Chinese unemployment increases and US consumers pay more.
However, the counter-argument is that it saves US jobs and businesses. Now
there is some validity to that claim. If the money sent to China doesn’t come
back in either demand for US goods, or FDI, then the argument can be
validated.

What we see as a result is that Chinese demand drives employment in other

industries. So jobs that may have been lost in one industry, are being created in
another. At the same time, the FDI inflows also create employment in the
relevant industry.
Although there is disruption, there is a net positive gain in the long term.
Employees will have to shift to new industries, but the average consumer
benefits from lower prices. By contrast, the only winner under protectionism is
specific domestic workers. However, they too are consumers and consequently
lose out too.
Trade protectionism has more than a few disadvantages, the most noteworthy of
which are the pressures it places on the very core principles of free trade.
Further disadvantages are the protections it offers to firms that contest on a
stage of price over quality, the incorrect sense of security that it builds and the
denial of easy access to certain products for consumers. At the core of
protectionism are tariffs, duties, quotas and any other measures designed to

18
restrict the import of foreign goods in interest of protecting domestic companies
from foreign take overs. More disadvantages are as follows:

1) Consumers pay more with protectionism. Without a system of competitive

pricing, domestic companies are free to raise their prices without raising the
quality of their goods. When a business has no competition then the consumer is
left without options.

2) Businesses suffer from protectionism too. Government support often builds

corporate contentment, which could lead to a business to believe that it has a
pleasant safety net set up behind it in the event of strong foreign competition as
these businesses might not have the resources necessary to survive on their own.

3) Trade protectionism limits consumer access to foreign goods and non-

domestic companies that offer unique products and services are also subject to
the restrictions.

4) Foreign businesses and domestic consumers face the greatest disadvantages

of trade protectionism. Businesses face imbalanced restrictions while their
domestic competitors are offered financial advantages, and the consumer ends
up paying higher prices for a limited variety of products that are not always
worth their costs.

5) Protectionism can cause a retaliation reaction from other nations, ruining

vital relationships between nations. a clear example of this would be the
relationship between USA and China, when the US put boundaries on the
Chinese tires , China retaliated by putting up barriers against different U.S.
goods such as their chicken. This kind of hostility between nations decreases the
specialization between two nations, eventually damaging the economy.

Additionally to all of this, some governments provide subsidies and loans to

businesses that are not able to compete against their foreign competitors. These
actions restrain the free market by giving benefits to domestic companies while
creating consequences upon foreign businesses. Some argue that trade
protectionism is a step towards anti-globalization because of these reasons.
Additionally to all of this, some governments provide subsidies and loans to
businesses that are not able to compete against their foreign competitors. These
actions restrain the free market by giving benefits to domestic companies while
creating consequences upon foreign businesses. Some argue that trade
protectionism is a step towards anti-globalization because of these reasons.

19
What should be the guiding principles for the government while deciding
whether to continue protectionism for a specific industry?

The history of trade development shows that protectionism and free trade
policies were replaced to correspond to a certain economic situation in the
world. However, there has been apparent shift to open markets, decreased trade
barriers and international cooperation among countries in the last few decades.
With all of this said, the impact of recent economic slowdown pushed many
countries to stray from free trade agreements in order to support domestic
economies and employment. As a result, what we are seeing today is
protectionism which is not an upfront declaration of a trade war using tariffs;
rather it is protectionism with non-tariff weapons. These metaphorical weapons
are used mainly by developed countries especially by many European countries.
Demands for labour and domestic market protection stand as a problem for
European leaders. They run against EU rules that guarantee the free flow of
goods, services and workers.

There are two sides of using protective policy, but it is clear that the
disadvantages of such policies will almost always prevail over its advantages.
Economists stress more on the threats rather than the benefits of protectionism,
and claim that it is not a solution for problems in the long run. For European
and other countries it is extremely desirable to find ways to increase
employment and reduce the impact of the crisis, but using any sort of protection
would have very little short run benefits. It would also result in reduced
worldwide employment very quickly and make growth prospects much more
difficult when recovery does come. It is not even a case of when one country
benefits at the expense of another. Such moves might bring upon a chain
reaction of protectionism that makes the economic slowdown even worse. One
country’s protection will not just hurt partner-country exports. Sooner or later,
the formers exports will be affected as well. Therefore Europe should avoid
adopting protective measures separately, as free trade is seen to be the only
solution to crisis by stimulating future growth and creating jobs in the future.

Based on economic theory, all elimination of trade barriers is beneficial to the

world economy. Through increasing trade barriers, by tariff and non-tariff
funds, domestic consumer costs increase, foreign exporters sales decrease and
efficiency gains through comparative advantage [4] are prevented. These
decisions are hence political. Arguable they have been put in place to prevent
possible rivals from catching up with EU countries. The statement that the
imports from the middle-income countries will be substituted by those from
low-income countries seems doubtful.

20
It is vital to distinguish between the cases for free trade for nations own benefit
and the case for free trade for all nations. The first is an argument for free trade
to improve one nations own well-being, also known as the national-efficiency
argument. The other is an argument for free trade to improve every trading
country’s welfare. Both of these cases assume that free markets determine
prices and there are no market failures. However, the reality is that market
failures can and do occur. Market failures can rise from governmental action as
well. Hence, governments may misrepresent market prices by subsidizing
production, as European governments have notably done and as all wealthy
countries governments do in agriculture. Governments can also protect
intellectual property unproductively, leading to underproduction of new
knowledge; they may also overprotect it. In those cases, production and trade,
led by inaccurate prices, will not be effective.

Proponents argue that protectionist policies shield the producers, businesses,

and workers of the import-competing sector in the country from foreign
competitors; however, they also reduce trade and adversely affect consumers in
general (by raising the cost of imported goods), and harm the producers and
workers in ...

One of the realities of the global trading system is that average import tariffs are
higher when imposed by developing countries than those implemented by
advanced, high-income nations. To what extent are protectionist policies such as
tariffs, import quotas, domestic subsidies and other trade barriers effective in
supporting growth and development for lower and middle-income countries?

Trade-weighted average import tariff rate (2018) Source: World Economic

Forum, Competitiveness Report, 2018

 Iran 29%
 Nepal 17%
 India 15%
 Ethiopia 14%
 Brazil 12%
 China 12%
 Kenya 11%
 South Korea 9%
 Vietnam 8%
 Mexico 5%

21
However there are also downsides / risks for developing countries if they
maintain high average tariffs on imported goods and services:

1. Tariffs may protect jobs in some industries e.g. car making but have
damaging effects elsewhere because they increase the prices of key
imported raw materials, components and capital technologies
2. Revenues raised by tariffs might only be a small percentage of total
government revenue and lost jobs in other sectors will diminish the net
effect on these revenues
3. There is always the risk of retaliatory action by other countries - a good
recent example has been the tit-for-tat trade war developing between the
United States and China
4. Protectionist tariffs risk causing a loss of competition for domestic firms
which eventually leads to lower productivity, less innovation and weaker
competitiveness
5. Tariffs increase prices for consumers leading to higher inflation, reduced
real incomes and an increased risk of poverty for poorer households

Protectionism is nearly always a bad idea because it is ‘protecting’

producers that are less efficient/cheap than whomever needs protecting
against. There are always more consumers than producers so the rational
approach should favor advantaging the consumer and helping your
populace to remain competitive in its own niches.

HOWEVER!

A nation must be able to remain independent. Or it loses its nation status.

That requires it must protect its strategic interests. Try buying strategic
goods, equipment, arms during a conflict. An enemy could prevent their
arrival, your trading partners may wish to not suffer because of their aid
or in fact may not agree with you chosen courses of action enough to
embargo you.

So there is a small set of goods and services that a country must maintain
sovereign control over to ensure its survival. The best defense would be
to have such a strong industry in each of these critical areas so that
protection in not necessary (ex. make the best fighter planes in the world
etc) and other countries do not want to lose you as the preferred supplier
but the economies of scale make that a very difficult objective for all but
the largest economies and their militaries. So protectionism to
protect/insulate from foreign dependence in key strategic goods is
definitely warranted/prudent.

22
23