PROTECTIONISM AND ITS EFFECTS ON BALANCE OF TRADE 7
Protectionismand its Effects on Balance of Trade
Protectionismand its Effects on Balance of Trade
Protectionistpolicies have been at the center of immense controversy in thecontemporary markets. This may have been triggered by the effectsthat they have not only on the trade relations between countries butalso the economic wellbeing of countries in both the long-term andthe short-term. Protectionist policies underline the actions of agovernment that are aimed at restraining or restricting internationaltrade usually with the aim of protecting the local jobs and businessentities from being run down by foreign competition. There are variedtechniques that are used in protecting the domestic markets includingdirect state intervention, import tariffs, quotas, and subsidies forthe local companies. It is worth noting that the policies usuallytarget the budding industries and aim at ensuring that they eitherhave control over the domestic markets for a particular duration orthat they have the capacity to offer their products at the lowestprices, thereby beating the competition from foreign companies.However, recent times have called into question the efficacy of theprotectionist policies in safeguarding the balance of trade for thebusiness entity in both the long-term and the short-term. Indeed,some scholars have underlined the notion that trade protectionistpolicies eventually hurt the same economy that enforces them(Dwivedi,2010).This argument is based on the notion that free trade is the way to goand that countries should specialize in the production of the goodsand services for which they are naturally predisposed to produce bestso as to benefit from free trade. However, there is some contentionover whether the same notion would be well founded in internationaleconomics. Indeed, current discussions and debates pertaining to theform of trade that is appropriate and the effects that open marketshave on the economy take on a hypothetical character or even occur asa result of influence of subjective reasoning or interest groups(Dwivedi,2010).Global economic crisis that have plagued the world in the recenttimes have resulted in an immense modification of policies and ideasagainst free markets and, in fact, favored government intervention.Essentially, questions remain on whether protectionist policies aremost appropriate for countries’ trade deficit. Whilethere may be varying opinions, it is evident that protectionistpolicies would enhance the trade deficit of countries.
First,protectionist policies come in handy in ensuring that the domesticeconomies are rolling. It is often acknowledged that buddingindustries may not have the capacity to compete with other wellestablished foreign companies particularly given that they are yet tocreate a proper customer base or even establish appropriateframeworks that would allow them to compete effectively in themarket. Protectionist policies, in this case, would give theseindustries a grace period for establishing appropriate frameworks andcustomer bases, thereby allowing them to become strong players in themarket in both the short-term and the long-term (Gupta,2004).Given that there would be a decrease in the imported goods, thedomestic firms would have considerably less competition, in whichcase they would have the capacity to continue developing. Thereduction in imports means that the country would be giving out fewerfinances to other countries, in which case the trade balance would beenhanced. The domestic economy would be strengthened in thelong-term, particularly given that there would be a reduction ofunemployment as the domestic firms increase and have more capacity toproduce, as well as sell goods with considerably less difficulty(Gupta,2004).Such ready markets and increased outputs and demand would necessitatethat the companies hire more workers in the long-term, with theincreased productivity meaning that the country would be capable ofimporting more, which subsequently enhances the trade balance.
Inaddition, protectionist policies would allow the new and upcomingbusiness entities and industries to develop at a more stable andnatural pace as they would not be under pressure from the foreign andmore experienced or established forms (Mankiw,2012).More often than not, companies and business entities fail simplybecause they have not taken time to study the markets and alignthemselves and their structures to the requirements of the marketenvironment. It is understandable that the business entities and theindustries would seek to develop at an accelerated rate, particularlyconsidering that there is always immense pressure from the market toenhance one’s competitiveness so as to safeguard the entities’profitability and sustainability (Mankiw,2012).While this may be the case, it also sets the businesses up forfailure as they end up not establishing strong foundations in thelong-term. However, protectionist policies allow such fledglingindustries to make these mistakes without folding up and find theirmost appropriate structures that enable them to grow until they havethe capacity to compete in the international markets while fosteringpositive elements for the domestic economy (Dwivedi,2010).
Moreover,protectionism comes as a proper defense or preventative measureagainst dumping. Dumping underlines a situation in which a particularforeign country exports some products to another country at a pricethat is way below that charged in the home market or even lower thatthe cost of production (Gupta,2004).While this may not be prohibited, it is condemned in theinternational market as it is injurious to the domestic industry ofimporting countries. Essentially, the protectionist policies would bea defense mechanism against the eradication of domestic industries,which means that they would eventually become competitive enough asto compete in the international market (Gupta,2004).
Ofcourse, there are some scholars who feel that protectionist policiesmay not be appropriate for countries as they stutter their growth.Indeed, there are instances where industries become lax as they arenot facing much competition, in which case they never really becomeefficient enough. This means that the domestic industries would neverreally become stable or competitive rather they would always bedependent on the protection of the governments so as to produce andbe profitable at any time. While this is the case, the effectivenessof the protectionist policies may be enhanced by giving a timelinefor the enactment of the same. Scholars have noted that in instanceswhere the business entities or industries know that the protectionistpolicies would only be in place within a particular duration, theywould be likely to make the appropriate effort to ensure that theywere well established so as to beat the deadline (Mankiw,2012).On the same, they could be complemented by constant evaluation toensure constant improvement, with the protectionist policies beinglifted gradually to allow them to fit appropriately in theenvironment. This would allow for improvement of the trade balance.
Inconclusion, protectionist policies have always drawn immensecontroversy in the contemporary society especially given its effectson the economy. Indeed it has been acknowledged that protectionistpolicies may have positive and negative effects on the economies ofboth the importing and exporting countries. More often than not,questions arise regarding whether the protectionist policies reallyenhance the trade deficit of the country imposing them. While theremay be varying opinions, it is evident that the protectionistpolicies enhance or improve the trade deficit of the country (Mankiw,2012).This becomes even more evident particularly considering its effectson the imports to the country. It is acknowledged that protectionistpolicies result in the reduction of imports to a particular country.This means that there would be less money lost to foreign companies,in which case the trade deficit would be reduced or even eliminated(Dwivedi,2010).In addition, it may cause an increase in the productivity of thedomestic companies in the long-term since they have the time to learnthe market and come up with proper strategies that would allow themto compete in the international markets. Of particular note is thefact that they would also be producing at a considerably higher ratesince they are more or less assured of the domestic market, in whichcase they would eventually become stable and even manage to export toother countries, thereby enhancing the balance of trade through theelimination of the trade deficit. Of course, there may be instanceswhere the protectionist policies actually worsen the trade deficit.However, proper and constant evaluation and monitoring of thefunctioning of companies in these industries, as well as settingdeadlines for them would allow for the prevention of such anoccurrence.
Dwivedi,D. N. (2010). Macroeconomics:Theory and policy.New Delhi: Tata McGraw Hill Education Pte Ltd.
Gupta,G. S. (2004). Macroeconomics:Theory and applications.New Delhi: Tata McGraw-Hill.
Mankiw,N. G. (2012). Principlesof macroeconomics.Mason, OH: South-Western Cengage Learning.