Discuss the effects of protectionist policies on the global economy
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Protection refers to any action by a national government that gives domestic producers an advantage over foreign competitors. In general, the amount of protection between countries has been declining due to a range of factors such as trade agreements which allows countries to benefit from free trade. However, there are many policies that a country can adopt to increase protection of trade such as tariffs and quotas in order to protect the domestic producers. Since WWII, many international organizations and trading agreements have been established to try and breakdown the trading barriers between countries and reduce the amount of protection to increase trade in the global economy.
There are many methods that a government can provide to protect domestic producers from international trade. The first method of protection is a tariff which is a tax imposed on imported goods. This method has been used by governments to increase the price of imports to allow domestic producers to be able to produce goods and sell it without such high competition. They can increase their supply of goods in the market and also charge a higher price. There is one main effect from this protectionist policy in the global economy and numerous effects on the domestic economy. Since the price of the imported good is higher within the domestic economy, consumers pay higher prices and will be less likely to purchase the imported good. This will lead to lower supplies of imports and less trade within the global economy. As Fig.1 shows, when imports are introduced, the quantity supplies by domestic producers significantly falls however the tariff raises the price of the imports and domestic producers can supply more.
Another form of protectionist policy is a subside. This is a cash payment made by the government to domestic producers to reduce the firms production cost of the product. This allows the firm to produce the good at lower prices, making them more competitive in the domestic market. As Fig.2 demonstrates, the effect of a subsides allows a domestic producers supply to increase due to lower production costs. The effect of this method of protection is that there is less market share in the domestic market for imports therefore decreasing the quantity of free trade in the global economy.
A quota restricts the amount of a good that could be imported into a country. A quota effectively allows domestic porducers to increase their market share and at the same time allows them to increase their prices. Quotas have many effects on the domestic market such as allowing domestic producers to have greater market share. Globally, a quota will limit the imports cause a decline in the trade between countries.
Local content rules refer to government protection policies where a certain percentage of the good or services has to be domestically produced. This allows the domestic producers not to be in competition with other imports. Other types of protection are export incentives where the government provides incetives for firms to expand and fund exhibitions. Voluntary export restraints are export countries that introduce quotas on their own exports so that they can charge a higher price for their product since there is less supply. And lastly, governments may impose technical specifications on goods so that export countries can’t export their goods if they don’t comply with regulations. All of these methods allow for domestic producers to have greater market share and decreases the amount of trade in the global economy.
All of these methods of protection are aimed at increasing the trade protection barriers of countries to guard the domestic producers from cheaper foreign goods being imported. All of these methods slow economic growth. As a result, new international organization were introduced to promote free trade and reduce protection restrictions. Trading blocs occur where many countries form multilateral agreements of free trade between them. This promotes growth in the global economy and more free trade of imports and exports.
The European Union is a trading bloc and multilateral agreement between many European countries which increases the growth of trade and reduces the protection within Europe. The EU has had significant influence on the involved countries by integrating their economies and allowing growth of competition against the rest of the world. The North American Free Trade Agreement (NAFTA) involves four North American countries to allow free trade between them. These important agreements have a significant effect on the global economy. The countries involved can benefit highly due to free trade between the countries resulting in a increase of trade in the global economy. Free trade amongst the countries can result in larger economies having a comparative advantage at being able to import more efficiently. Trading blocs between the reduce the protection between the countries involved, however, the trading barriers between other countries increases significantly. This can have a slowed growth in the global economy since many countries loose trade with countries that enter free trade agreements.
International organisations have been established to manage the world economy, increase world trade and assist countries to grow economically. The Organization for Economic Cooperation and Development (OECD) consists of 29 industrialized countries that promote growth, employment and living standards for its members. The World Trade Organisation (WTO) is responsible for reducing trade protection and significantly expanding world trade. It reduces tariffs, quotas and other forms of protection and through imports and exports, has promoted trade expansion. The WTO have control over many economies and is able to force regulation and rules onto the countries trading policies. The WTO has been trying to persuade OECD countries to reduce tariffs and subsidies on agricultural and farm products. This would change and increase world trade for poorer countries that export these products. Other international organisations are G8 which is a group of the largest economies, the International Monetary Fund (IMF) and the World Bank. The organisations manage the international finanacial and trading system.
There are many reasons why a countries would decide to implement protection policies. One important reason is that domestic producers can’t establish themselves in the short run due to so much competition in the market from international producers. By implementing tariff and non tariff barriers, the domestic producers can set up their firms without as much competition. Another reason is that a large country can use protection to improve its terms of trade. A tariff can decrease a country’s demand for imports, so if the country buys a large proportion of the world supply, it can encourage foreign producers to lower their prices to counter falling sales. This would improve the terms of trade between the countries.
The implementation of protectionist policy has a negative effect within the global economy due to less trade and more restriction. In Australia, the trend is toward low levels of protection which is similar to other high income countries. However, industries such as textile, clothing and motor vehicles have a great deal of protection to lower the quantity of imports into the country.
The methods of protection allow domestic economies to decrease the amount of imports coming in resulting in less trade in the global economy. Through bilateral and multilateral agreements, trading blocs and international organisations, an expansion in trade and reduced protection can occur. All of these forms have various effects on both the domestic global economy. The protectionist policies have positive and negative impacts on the global economy.
Leading Edge Preliminary Economics – Tim Dixon