Analyse the impact of protectionist policies on the domestic and global economies

Essay by Pwincess^IcicleHigh School, 12th gradeA, July 2005

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Free Trade occurs when there are no artificial barriers between nations imposed by governments in order to restrict trade. When barriers such as protectionist policies exist, free trade becomes restricted. Protection is essentially defined as any action by national governments that will give an artificial competitive advantage to domestic producers over foreign producers. National governments will aim to protect or shelter their nation from the disadvantages of free trade, through protectionist policies in the form of subsidies, tariffs, local content rules, quotas, export incentives and voluntary export restraints. Reasons for protection include "The Infant Industry argument " which states that some industries in a given country may develop a comparative advantage if only they are sheltered from foreign competition for a while, by means of temporary protection. So if, in the future the infant industries 'grow up' and form a comparative advantage, the domestic economy will gain access to a larger demand market, creating an injection into the economy, resulting in increased economic activity and employment.

The domestic protection argument rather states that because free trade, and increased global competition can result in structural unemployment. It has hence become apparent that infant industries need to be protected, dumping prevented, domestic employment sustained and the defence and self sufficiency of a nation ensured.

The infant industry argument outlines the need for protection in order to establish industries that can form a comparative advantage in the future, if sheltered from competition for a little while. This ultimately means a reduction in free trade, which would otherwise have brought the advantage of advanced technology, imports and managerial methods. However if these industries do grow up, and protection is successfully removed, those industries are able to provide more goods and services in an increasingly competitive environment meaning those firms will be forced to reduce...