Trade Protectionism Essay, Research Paper

Protection is any attempt by the government to give the domestic producer an artificial advantage over a foreign producer. The government can protect its industries in three ways: restricting the quantity of imports (quotas), lowering the price for domestic producers (subsidy) or increasing the price of imports (tariffs). Australia now stands at the crossroads of two paths. Should we continue as we are, reducing tariffs, which since the mid 80 s has seen Australia s ratio of exports and imports to Gross Domestic Product (GDP) each rise from around 15% to 20%? On the other hand, should we look after what industry we still have and protect the inefficient ones? Australia had been one of the largest advocates for protectionism up until the 70 s when the level of protection began to fall, and by 2000 is projected that the average rate of protection would fall to 5%. This is in line with most other developed countries

ARGUMENTS FOR PROTECTION

 Infant industries will be killed off by the market unless they are given protection and allowed to grow up and produce economies of scale.

 Dumping by overseas firms to flood the market and sell at below production costs may destroy domestic producers if they are unable to resume supply.

 Diversification of production protects economy from fluctuations of one industry. Diversification helps to spread the risk.

 Increased employment by protecting an industry which otherwise would not exist.

 Favourable Current Account Deficit (CAD) by reducing imports via tariffs

ARGUMENTS AGAINST PROTECTION

 Inflation increases because reduced competition, production costs and import costs increase, wage costs increase

 Causes net unemployment by causing inflation, hitting exports, inefficient resource use, reducing real incomes and spending power in the economy

 Decreased growth by inefficient resource use, decreased aggregate demand (AD), reducing incentives.

Through trade liberalization and a reduction in protection, some industries may be hurt, as was the case with the car and textiles, clothing and footwear (TCF) industry. Between 1985 and 1996 employment in TCF industries had fallen by 18%, or, 21000 jobs. It is interesting to note that during the same period total manufacturing employment fell by only 2% and that employment in the whole industry grew by more than 25%. However bad this may look on the surface it still falls in line with what economic modeling tells us.

Economic modeling states that in the short term the losers of reduced protection will be those who are employed in an inefficient industry. Without the aid of tariffs, quotas etc these industries will be out competed by the more efficient foreign companies. This leads to the downfall of domestic producers and the loss of jobs. But, is this a bad thing?

In the short term it will be. Unemployment is a loss in potential output, which sees the economy working inside its Production Possibility and results in a GDP gap. Unemployed people also have less expendable income and leads to a reduction in aggregate expenditure. There are also the social effects of unemployment which should be taken into account.

However when following the economic model these short term problems are overshadowed by long term gains. Theory says that the unemployed are not being put out of a job, the labour resource is just being re-distributed to another industry. In the case of the TCF, the loss of 21000 jobs in manufacturing was softened by the growth (equivalent to 60% of the jobs lost) in distribution. Around 13000 jobs were created in the area of wholesaling, importing and retailing. This is the redistributional effect of reducing protection labour lost in one area is being used more efficiently in another. All this means is that of the 21000 people put out of work by liberalization of trade 13000 were re-employed into a different sector of the same industry.

Although trade liberalization is bad news for individuals in some industries, the long term benefits for the entire economy is very much good news. For the consumer it means cheaper goods and services, making the opportunity cost of each item less. It increases the competitiveness within the market forcing the producers to better their product again it is the consumers who gain because for the same price they receive a more satisfying good. The downside however may be a blowout in the Current Account Deficit (CAD). With removal of tariffs imports begin to look more attractive to the consumer. The result: a large negative figure for the balance on goods and services, which, is the largest single determinant for the size of the CAD.

The Australian economy may benefit greatly from a reduction in protection. However many individuals will be left out of job if Australia continues its current trend. The government must now think if economic stability is worth this loss.