Protectionist Policies
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Analyse the impact of protectionist policies on the domestic and global economies.
The benefits of globalisation, the increased integration of domestic economies into one global economy, cannot be fully materialised if protectionist policies are implemented. Protectionist policies have a negative impact on both the domestic economies of the world and also the world economy, as globalization is hindered. The concept of comparative advantage is not utilized, cheaper prices are not developed for consumers and inefficient and uncompetitive industries are allowed to continue to operate. Hence the protectionist policies of increased tariffs, subsidies, quotas and even embargoes impact negatively on both the domestic and global economy.
With domestic economies, implanting tariffs on imported and giving subsidies to their own domestic produces inefficient industries. The resources of the domestic economy are not being utilized as the resources in the inefficient industries could be better utilized in efficient competitive industries which then can export products overseas, increasing GDP and domestic employment. Singapore for example has implemented economic policy involving very low tariff levels, which has led to the island nation forming internationally competitive industries in refining and finance. The nation has increased its GDP by 23% through 1992 to 2002. Unemployment has dropped from a high of 13% in 1991 to a low of 4% in 1999. By abandoning protectionist policies the nation has developed into a Newly Industrialised economy, resulting in increased living standards in Singapore.
Furthermore protectionist policies lead to decreased employment opportunities in the long term as the economy is not able to expand of grow quickly through use of globalization. With no real increased job prospects in the inefficient domestic industries in the long-term the unemployment rate will rise.
Higher inflation is another effect of protectionist policies. With dearer imports the factors of production will be more expensive, leading to increases in prices and so increases in inflation. This occurred in Australia during the early 1980s with still relatively high tariffs. For example economically efficient Australian farmers were forced to buy imported capital at increased prices that led to their own prices on food stuffs to increase.
As stated, protectionist policies have a negative effect on consumers that must pay a higher price for imports, leading to an overall decrease in the amount of material possessions consumed or acquired. This again leads to an overall decrease in the standard of living.
Protectionist policies also protect domestic economies from foreign investment which can be highly beneficial. Foreign Direct Investment can lead to increases of levels of production, increased employment opportunities and increase technological gains for the domestic economy. Protectionist policies can severely hinder economic growth prospects by not allowing any foreign investment. In Australia for example, the level of domestic savings is very low which makes it difficult for businesses to borrow funds to expand operations. Within a free domestic market they would be able to acquire foreign loans or merge with foreign companies to expand.
As stated before, protectionist policies whether in the form of tariffs, subsidies, quotas or investment restrictions restrict the level of economic growth and domestic businesses are not able to become internationally competitive. This shall lead to either a decrease or very low increased in real wages and incomes for domestic workers. Again this leads to an overall decrease in living standards for the domestic economys citizens.
Protectionist policies have a direct negative impact on the global economy. When domestic economies protect their local industries, the free trade of goods and services is restricted. With exports not being able to penetrate other markets because of artificial barriers consumers do not get the variety of foreign products. In essence, a global economy is not allowed to form because of protectionist policies preventing the free movement of finance, goods, services, capital and labour. Globalisation is not forced and its various benefits