Discuss whether protectionism can be justified under certain economic conditions.
b. Discuss whether protectionism can be justified under certain economic conditions. [15]
Introduction
Protectionism refers to the use of trade barriers—such as tariffs, quotas, and subsidies—to shield domestic industries from foreign competition. While economic theory largely favours free trade due to the gains from comparative advantage and specialisation, there are circumstances under which protectionist policies may be justified. These are often grounded in attempts to correct market failures, promote long-term strategic interests, or prevent economic instability. However, protectionism is also associated with significant drawbacks, including inefficiencies, retaliation from trading partners, and rising costs for consumers.
Justifications for Protectionism
Infant Industry Argument
One of the most common justifications for protectionism is the infant industry argument. It suggests that nascent industries need temporary protection to develop the capabilities, scale, and efficiency needed to eventually compete on their own. Without such protection, these fledgling industries might be crushed by established foreign rivals with cost and technological advantages.
However, Malaysia’s national car project—Proton—illustrates how protectionism in the name of nurturing infant industries can fail. Launched in the 1980s with the vision of creating a globally competitive domestic car manufacturer, Proton was heavily protected from foreign competition through import tariffs, quotas, and preferential treatment in government procurement. These measures were intended to provide Proton with a “safe space” to mature and eventually become globally competitive.
Decades later, however, Proton never truly developed the competitiveness expected. While it initially gained significant market share in Malaysia, it struggled with low productivity, limited innovation, and poor build quality compared to Japanese and Korean rivals. Without sustained pressure to innovate and compete, Proton became complacent, and the domestic car market remained underdeveloped. The prolonged protectionism led to higher car prices for Malaysian consumers and inefficient resource allocation, ultimately burdening the broader economy.
This case highlights the risk of infant industries becoming permanently dependent on protection, especially when protection is not time-bound or tied to clear performance benchmarks.
Predatory Dumping Argument
Protectionism can also be justified in cases of predatory dumping, where foreign firms intentionally sell goods at below-market prices—sometimes even below cost—to gain market share and drive domestic competitors out of business. Once the local competition is eliminated, the dumping firm may raise prices and exploit its market dominance.
To counteract this, governments may impose anti-dumping duties to restore fair competition and protect domestic producers from unsustainable price wars. For instance, both the EU and the US have implemented anti-dumping tariffs against certain Chinese steel products. These measures aim to prevent structural damage to domestic industries deemed essential for national security or strategic development.
However, it is important to acknowledge that not all dumping is predatory. In some cases, foreign firms may enjoy lower production costs due to comparative advantage or temporary oversupply. Moreover, consumers may benefit from cheaper prices in the short run. Thus, anti-dumping measures should be carefully evaluated and evidence-based.
Arguments Against Protectionism
Retaliation and Trade Wars
One of the clearest dangers of protectionism is retaliation. When a country imposes tariffs or quotas, its trading partners may respond with protectionist measures of their own. This can spark trade wars, which depress global trade and economic growth.
For example, the US-China trade war under the Trump administration saw the imposition of tit-for-tat tariffs on hundreds of billions of dollars’ worth of goods. The result was higher input costs, disruption to supply chains, and uncertainty for businesses. Both economies suffered: export volumes declined, firms held back investment, and consumers faced higher prices.
Protectionism thus often leads to a fall in (X-M), reducing aggregate demand (AD) and, through the multiplier effect, causing a contraction in national income and output.
Beggar-Thy-Neighbour Effects
Protectionism can also lead to beggar-thy-neighbour policies, where one country's gains come at the expense of another. By shielding its own industries, a country reduces demand for imports from its trading partners. This causes a fall in their export revenues, leading to lower AD, falling income, and rising unemployment abroad. In response, those countries may reduce imports themselves, including from the original country, worsening the global slowdown.
This feedback loop damages the very international trade system that underpins global growth and cooperation, making all countries worse off in the long run.
Higher Costs and Lower Standards of Living
Protectionism often raises prices for consumers and producers alike. Tariffs on imported goods lead to higher domestic prices, reducing consumer surplus and purchasing power. Additionally, firms that rely on imported inputs face rising production costs, which may reduce their export competitiveness or force them to pass on costs to consumers.
The result is cost-push inflation, particularly damaging in open economies like Singapore that depend heavily on imported goods. For lower-income households, this erodes the real standard of living and contributes to economic inequality.
Evaluative Conclusion
Protectionism may appear attractive in specific contexts—particularly for strategic sectors, infant industries, or in the face of unfair foreign competition—but it is a tool that must be used sparingly and with caution. Malaysia’s Proton serves as a cautionary tale: while protectionism may offer short-term breathing space, it can also foster long-term inefficiency and harm consumer welfare if it becomes entrenched.
Even when justifiable, protectionist policies should be time-bound, performance-based, and transparent, with a clear plan to phase out protection once the targeted industry matures. In the broader context, however, free trade remains the preferred mechanism for maximising efficiency, innovation, and global welfare.
Ultimately, while protectionism can be justified under certain economic conditions, it is seldom the optimal long-term strategy, and its unintended consequences often outweigh its short-term benefits.
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