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Sample Case Study on Protectionism

Case Study on Protectionism

Protectionism is the process in which domestic markets are protected of overseas products flooding our markets, in other words protectionism is to discourage imports. Trade Protectionism is adopted by all countries of the world and in some way or another protectionism policies are exercised to some extent. There are a large number of ways in which a country may choose to erect trade barriers for example, tariffs and quotas.

By definition a tariff is said to be a tax on imports and can be used by governments as revenue and it as financial spending. A tariff is setup in order to encourage domestic producers. When an imported product is taxed the price of the product is increased, for example Japan may sell a car for $30 000 and with an introduction of a tariff this car could be now worth $35 000. The new price now sets up a demand for a different car in being a domestic car. Therefore domestic producers are protected from the inflow of cheaper products.

Another technique used too exercise trade protection is a quota. A quota is a physical limit on imports. For example Australia might put a quota on international bananas to encourage the sale of domestic bananas produced in Australia. Additionally quotas are setup in order to prevent dumping; dumping is the sale of goods at less than the cost of production by foreign producers in a domestic market. Products can only be “dumped” if is no demand for bikes for example and the foreign producer has produced several bikes and in order to get rid of the stock they “dump” them into other economies and create competition with domestic producers.

Other methods of protectionism include inspection of imported products. A few years back Australia exported oranges and other varieties of fruit to Japan and the Japanese government in order to protect domestic producers sent inspectors one month after the products where exported to Japan obviously the fruit had rotted and was sent back. Recently, Australia sent a whole lot of wheat over the Iraq and again to protect domestic producers the Iraqi inspector’s venomated the wheat sent them back too.

Furthermore safety standards are another method of trade protection, going back to the car example, if Australia’s car standards are much higher than Japanese car standards then the Japanese cars would need to be moderated to be adequate to meet the Australian obligations and eventually increase the price of the imported car.

Arguments used to justify protection are the infant industry argument and is made to protect and keep newly established firms so they can survive in the highly competitive market. If firms are closing down because of cheaper imported products then alternatively unemployment will increase and government will need to work harder to achieve domestic stability. To achieve domestic stability, gross domestic product (output) must increase 3 – 4% from the last period, the economy must have full employment (5% unemployment) and inflation should be controlled to 2 – 3% per annum. If unemployment increases then it would be difficult to achieve stability. This continues onto another argument to justify trade protection in being job protection. Australian jobs must be secure and well protected. Additionally safety hazards are another reason to justify trade protection especially in today’s environments many diseases are occurring such as Maninga Cockle and SARS.

Preventing dumping from cheap labour Asian countries such as China is another argument to justify protectionism. Dumping occurs for three reasons surplus stock, to drive out domestic competitors and because they are unable to find a market for a particular product. It is said to be unfair to other economies such as the U.K, Australia and others whom, pay high wages in order to keep the standards of living on the increase that countries like China, have a large population that is unable to find jobs (scarcity), pay low wages knowing if the worker does not like it they can easily get replaced and as a result cost of production is low hence the products can be sold cheaply.

Besides economies must meet the terms of trade which is a ratio comparing exports to imports (tariff │ imports decrease │ terms of trade improve) and decrease the current account deficit. This is setup in order to meet external stability which is to have a relatively strong exchange rate and a minimal amount of foreign debts. Also to prevent heavy reliance on other economies to supply goods and services.

In the Lorenz Graph above the line though the center (450 line) is the line of perfect income equity and the blue curve (Lorenz Curve) the real equity of income in Australia. The gap between the two is called the gini co-efficient and as the gap widens the gap between the rich and the poor will be greater. To prevent the gap from widening trade protection is applied and keeps all income inside Australia and hence 100% of the income goes to 100% of the people and not to foreigners.

The only valid argument against trade protection is consumer sovereignty and that is if domestic producers can not meet the obligations of the consumer then the consumer has to go to somewhere else where it’s provided. As a result the consumer has the pay the extra tax on the product in order to maximize satisfaction. For example Australia is a agricultural and producer of only raw materials such as metals, coal, however Australia can’t produce technological products such as computers and hence consumers are forced to by foreign goods.

In conclusion I believe that trade protection is necessary however not to an extreme extent where imports are too costly.

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