Question

examine the ways an economy can control imports and specifying the advantages and disadvantages of each approach

Answer 1

Trade protectionism is a policy that protects domestic industries from unfair competition from foreign ones. The four primary tools are tariffs, subsidies, quotas, and currency manipulation.

Protectionism is a politically motivated defensive measure. In the short run, it works. But it is very destructive in the long term. It makes the country and its industries less competitive in international trade.

Protectionism fell out of favor after the Smoot-Hawley Tariff of 1930. It was designed to protect farmers from agricultural imports from Europe. U.S. farmers were already suffering from the Dust Bowl. European farmers were ramping up production after the destruction of World War I. But Congress added many other tariffs. Other countries retaliated. The resultant trade war restricted global trade. It was one reason for the extended severity of the Great Depression.

Governments also frequently subsidize local industries to help them compete in the global market. Subsidies come in the form of tax credits or direct payments. The most commonly used are farm subsidies. That allows producers to lower the price of local goods and services. This makes the products cheaper even when shipped overseas. Subsidies work even better than tariffs. This method works best for countries that rely mainly on exports.

But sometimes subsidies can have the opposite effect. The Agricultural Adjustment Act of 1933 allowed the government to pay farmers not to grow crops or livestock. The government wanted to control supply and increase prices. Farmers could also let their fields rest and regain nutrients due to overproduction. It helped the agriculture industry but raised food costs during the Depression.

A third method is to impose quotas on imported goods. This method is more effective than the first two. No matter how low a foreign country sets the price through subsidies, it can’t ship more goods.

Advantages

If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors. That gives the new industry’s companies time to develop their own competitive advantages.

Protectionism also temporarily creates jobs for domestic workers. The protection of tariffs, quotas, or subsidies allows domestic companies to hire locally. This benefit ends once other countries retaliate by erecting their own protectionism.

Disadvantages

In the long term, trade protectionism weakens the industry. Without competition, companies within the industry have no need to innovate. Eventually, the domestic product will decline in quality and be more expensive than what foreign competitors produce.

Job outsourcing is a result of declining U.S. competitiveness. Competition has declined from decades of the United States not investing in education. This is particularly true for high-tech, engineering, and science. Increased trade opens new markets for businesses to sell their products. The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by $500 billion.

Increasing U.S. protectionism will further slow economic growth. It would cause more layoffs, not fewer. If the United States closes its borders, other countries will do the same. This could cause layoffs among the 12 million U.S. workers who owe their jobs to exports.