Protectionism may seem beneficial in the short run, but ultimately it damages the economy

Question – Protectionism may seem beneficial in the short run, but ultimately it damages the economy. Comment. 2 February 2022

AnswerProtectionism refers to government actions and policies that restrict international trade. Such policies are often adopted with the aim of protecting local businesses and jobs from foreign competition.

Its primary objective is to make local businesses or industries more competitive by raising the price of goods or services or by limiting or restricting the amount of imports into the country. Protectionist policies typically focus on imports, but may also include other aspects of international trade, such as product standards and government subsidies.

Despite the fact that almost all mainstream economists agree that the world economy generally benefits from free trade, protectionist policies have been implemented by many countries.

Arguments in favor of “protectionism”

  • Protectionism deals with the risk of dependence on other countries for economic stability. It is argued that economic dependence in the event of war may limit the options available. Along with this, a country can negatively affect the economy of another one.
  • It is argued in favor that increased domestic purchases increase national output, and that this increase in output contributes to the creation of a healthy domestic job market.
  • Patents protect innovators in in-house systems. However, globally it is very common for developing countries to copy new technologies through reverse engineering.
  • It is common for companies to identify and outsource their jobs to countries with cheap labor and simple governance systems. This results in loss of jobs in domestic industries.

Arguments Against Protectionism:

  • With local industries having protectionist influence, they have no motivation to invest in innovation or research and development for new products.
  • Protectionist policies like restricting imports can lead to an increase in the prices of goods in the domestic market, which directly affects the interests of consumers.
  • The rules of the WTO prohibit the imposition of restrictions on imports from any other countries across the globe. Such restrictions can be imposed only for certain purposes such as balance of payments difficulties, national security. Such constraints can’t be imposed to protect the domestic industry from a good and healthy competition.
  • The dreams and aspirations of students seeking education and employment opportunities in those countries are most affected by the protectionist measures taken by the developed countries. Economists believe that the policy of protectionism weakens the industries of that country in the long run.

Way Forward:

  • The focus should be on promoting innovation, R&D and entrepreneurship in the country. This will prepare indigenous companies to compete in future sectors.
  • Private investment should be encouraged, this will boost growth, employment opportunities, exports and demand.
  • Predictable and transparent business policy will give an opportunity to the firms to plan their capacity and finance in advance. They will be able to allocate their resources for expansion and R&D.

Improving ‘ease of doing business’ can help firms to compete globally and capture a larger market share.

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