IV.

Arguments for Protection

Despite the conclusions of classical theory, few countries have ever actually adopted a policy of free trade. The major exception was Great Britain, which, from the 1840s until the 1930s, levied no import duties of any kind. The historical prevalence of protectionist policies reflects in part the strength of industrial vested interests fearful of foreign competition, and in part the strength of various theoretical arguments for protection. Such arguments can be classified in three groups: those intended to influence the composition of production; those intended to influence the level of employment; and those intended to influence the distribution of income. Under appropriate circumstances all three groups of arguments have theoretical validity as well as limitations.

One of the oldest arguments for protection is the so-called infant-industry argument. According to this theory, when foreign competition is reduced or eliminated by import barriers, domestic industries can develop rapidly. After their development is complete, they should theoretically be able to hold their own in competition with industries of other nations, and protection should no longer be required. In practice, however, protection frequently cannot be removed, because the domestic industries never develop sufficient competitive strength. The limitation of the infant-industry argument is its inability to identify those industries that are capable of growing to genuine maturity.

The national defence argument for protection seeks to avoid dependence on foreign sources for supplies of essential materials or finished products that might be denied in time of war. The limitation of this argument is that identification of those industries indispensable for national defence is difficult.

A third instance in which protection is advocated is to counter dumping from abroad. Dumping occurs when products are made available as imports at prices lower than the prices prevailing in the exporting country. Protection may be justified in these circumstances, but only if the clear intention of foreign suppliers is to establish a permanent monopoly by driving domestic suppliers out of business.

During periods of unemployment, protection is often urged as a means of increasing employment. With imports reduced, demand for domestic substitutes will be stimulated, expanding production at home. Economists Call this a “beggar-my-neighbour” policy: The improvement of employment at home is achieved entirely at the expense of employment elsewhere. The limitation of such a practice is that it invites retaliation from other nations suffering from similar problems of unemployment.

Protection can be used to redistribute income either within nations or between nations. For example, if a nation finds that the demand for its exports is relatively strong, it can gain income at the expense of other countries by imposing tariffs or other import barriers. Foreigners will then find it more difficult to earn the income to pay for the exports they desire. Consequently, they will be forced to reduce their prices, thus improving the terms of trade for the protectionist nation. Like the employment argument, this method invites retaliation from abroad.