Sarat Chandra IAS Academy

UPSC Civils Daily Mains Question 26th February-2021

Q) “Trade protection is the deliberate attempt to limit imports or promote exports by putting up barriers to trade. In this light examine the effects of trade protectionism on global trade.”

 Answer

Trade protectionism and nationalism is defined as a nation, or sometimes a group of nations working in conjunction as a trade bloc, creating trade barriers with the specific goal of protecting its economy from the possible perils of international trading. This is the opposite of free trade in which a government allows its citizenry to purchase goods and services from other countries or to sell their goods and services to other markets without any governmental restrictions, interference, or hindrances. The objective of trade protectionism is to protect a nation’s vital economic interests such as its key industries, commodities, and employment of workers.

Effects of trade protectionism on global trade

Consumers’ limited choice and pay more for goods and services:

  • A key effect of trade protectionism is that consumers will have a limited choice of products and goods since there may be quotas on how much may be imported. Due to these quotas, consumers will have a very limited choice as to the quantity, quality, and type of product that would otherwise be available to them without trade protectionism.
  • Another problem that consumers will face is that they will have to pay more for the limited quantity of goods and products, thus causing inflation to possibly greatly increase.
  • Infant industries may never grow up due to government trade protection policies
  • A nation can use the policy of protecting its infant industry, but for how long is a key concern. The protection of an infant industry may actually end up costing a government a significant amount of money and financial resources in order to protect its infant industry.
  • This may actually promote inefficiencies by the infant industry and have no incentive to make efficient, intelligent, long-term investments by borrowing funds or issuing common stock from the domestic international capital markets.
  • This type of protectionism may hinder the growing pains and maturation process that are vital for an infant industry to experience in the short and long-term if it is to be successful and competitive in global markets and eventually have a comparative advantage.

 

Exchange rate controls that causes long-term inflation:

  • Since the domestic nation has kept the value of its currency low. By having its currency decrease in value so that it can sell its products and goods at cheaper prices in foreign markets, any foreign products sold in its market will actually see prices increase.
  • Consumers will be forced to pay higher prices for goods, products, and commodities they need to survive. The problem is that a nation may have a good intention of helping its industries be competitive abroad while its citizens pay higher prices at home.

Protecting jobs and industries:

  • Is a political argument for trade protectionism from the viewpoint that protecting worker’s livelihood and the industries and the firms that employ them are vital to a nation’s economic growth and well-being.
  • The premise is that without trade protectionism a nation could lose long-established industries and companies that first made a product in a particular nation. This will eventually result in the loss of jobs, rising unemployment, and eventual decrease of a nation’s gross domestic product (GDP)

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