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Meaning and Definition:

“A policy of encouraging domestic industries by the imposition of tariffs on foreign products and payment of bounties to home industries is known as protectionism“.

An import duty aims at discouraging imports by making them dearer to the domestic consumers. The payment of bounty to home industry artificially stimulates exports and thus enables it to stand on its own feet in due course of time. After the end of Napoleon war i.e., in the 19th century, protectionism appeared in U S A. Later on Germany, imposed custom duties on foreign products and developed her industries behind tariff walls. Great Britain which had taken an early start over ether countries in most branches of manufacture was the last to favor protectionism.

Advantages and Examples:

The main advantages and examples which are advanced to support the policy of protectionism are as follows:

(i) National Defense: Protectionism has been advocated on the ground that in times of war or any other emergency an entire dependence on foreign goods which are very essential for defense or consumption purposes is very dangerous. It is stated, therefore, that a country must build up her own iron and steel industry and develop farming industry even if these involve an economic loss to the country.

(ii) Preservation of Certain class of Population or Certain Occupation: The government of a country on political or social grounds may favor protectionism for preserving certain classes of people or certain occupations. For example, the agrarian population is generally more submissive and loyal to the government than the industrial population If government wishes to preserve this class of people, then it will levy heavy import duties on foreign agricultural raw material and thus encourage them to take interest in their farming industry.

(iii) Diversification of Industries: Frederic List, a German economist, favors protection with a view to diversifying industries in a country. Under free trade, a country will specialise in the production of those commodities in which it has a relative price advantage over other countries. A country can specialize completely in one or few goods at the most. This means the country will put all her eggs m one basket, if war breaks out or the export prices of the goods go down, then it will face severe hardship. It is therefore, advocated that for bringing about a balanced economy in the country, protection should be given even to those industries which do not posses natural superiority.

(iv) To assist New Industries: Alexander Hamilton, Frederic List, J.S. Mill. Alfred Marshall, Taussing and other orthodox economists have clearly advocated protection for the industries which are still in their infancy. A newly established industry, says List, is just like a newly born baby. As the baby cannot grow up unless it is nursed and well protected, similarly, an infant industry cannot face the blast of foreign competition unless it is given full protection till it grows to its full structure.

Protectionism to the new home industries is necessary because the industries in other countries have taken an early start and they are enjoying the economies of mass production, while the home infant industries are still in their early stages and are producing small output.

The economists have justified protection for infant industries only. Once the industries grow up and reach maturity, protective tariffs should be removed. But in actual practice, it has been observed that infant industries never feel themselves grown up; if they grow up at all, they devote their strength in fighting for bigger and longer protectionism.

Secondly, if protection is given to those industries which cannot stand on their own feet when left unprotected, then the resources of the country are diverted from more advantageous uses to less advantageous ones.

(v) Protection to Guard against Dumping: If a foreign firm enjoying monopolistic or other advantages resorts to dumping with a view to capturing foreign markets, then the other countries must protect their industries by levying high protective duties on foreign goods. As selling of goods under cost (dumping) in other countries is temporary and spasmodic in nature. The anti-dumping duties should also be temporary. If dumping is permanent, then higher tariffs should be imposed permanently on foreign products.

(vi) Keeping Money at Home. Protectionism is also advocated on the grossly fallacious argument of “Keeping money at home”. In the words of Robert Ingersoll:

“When we buy manufactured goods abroad, we get the goods and the foreigners get the money. When we buy the manufactured goods at home, we get both the goods and the money”.

The criticism on this protection argument is that the foreign goods are purchased because these are cheaper and better than the home protects. If we buy from the home market, this means we are buying in the dearer market. As consumers, we suffer a financial loss. We may buy the home products and suffer a loss for the sake of other considerations but not for simply keeping money at home.

(vii) Protection of Revenue: Protectionism is also advocated on the ground that it raises revenue for the state. To this it is pointed out that if prohibitive high tariffs are imposed on the import of foreign goods, then they may not be imported at all and the government would not able to collect the revenue at all. On the other hand, if a moderate protection duty is levied, then it may serve both the purposes of collecting revenue and protecting industries.

(viii) Protection for Retaliation: Some economists recommend that if a country uses high protection tariffs, the other countries which have trade relations with it should also impose custom duties on her products in retaliation. From the study of the tariff history, it has been observed that the retaliatory tariffs have usually resulted in raising the tariffs still higher. It has been suggested, therefore, that commodity tariffs should be imposed as a bluff but if the bluff does not make the other country to reduce the tariffs, then the countries should given them up because they can gain more by lowering tariff rather than by raising it.

(ix) Protection for Conserving National Resources: Carey, Pattern, and Jevons have argued that production is essential for preserving the natural resources of a country. The unchecked trade often leads to exhaustion of mineral resources which are very vital for the development of the country.

(x) Production for Maintaining High Standard of Living: It has been argued that a country with a high standard of living cannot successfully compete with a country having low standard of living. Because the country enjoying high standard of living has to pay high wages to its workers; which means high cost of production.

On the other hand, the country with low standard of living has to pay low wages to its employees which means low cost of production. The results of this disparity in money wages is that a country with high money wages is undersold by a country with low money wages. Hence, the former country must protect its industries by raising high tariff walls from the latter.

The validity of this argument is questioned on the ground that if in a country, the money wages are high, it is not necessary that the cost of production will also be high.

(xi) Protection for reducing Unemployment: It has been claimed that the use of tariffs discourages imports and raises their prices to the domestic consumers. This leads to diversion of demand for goods produced at home. The home industry is encouraged and thus more employment is provided for the home population.

This argument is contradicted on the ground that when tariffs are imposed on imports, the other countries may retaliate by levying import duties on her exports. So, the increase which has taken place in the employment in the protected industries will be offset by a decrease in the employment of export industries. The result is that there may not be any net increase in the total employment of the country.