Note4Students

From UPSC perspective, the following things are important :

Prelims level: Comparative advantage

Mains level: Paper 3- Globalisation and issues with it

Protectionism involves the use of one or more restrictions on free trade between countries. What are the main reasons why this should be avoided?

The main arguments against protectionism are outlined below:

Market Distortion and loss of Economic Efficiency

Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:

Higher Prices for Consumers

Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.

Reduction in Market Access for Producers

Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.

Extra Costs for Exporters

For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

Adverse Effects on Poverty

Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.

Retaliation & Trade Wars

There is the danger that one country imposing import controls will lead to retaliatory action by another.