Critically evaluate the potential justification for protectionism

Introduction
A number of governments are concerned with unemployment and recessionary impact following the financial crisis. The result of this has been for many to be being placed under political pressure to implement protectionist instruments such as tariffs. quotas and subsidies (Love et al, 2014). This essay will identify the five principal instruments used by governments for protectionism and their consumer welfare implications. It will then seek to critically evaluate the justifications used for protectionism.

Protectionist instruments and their welfare implications
Protectionist instruments can be defined as a policy though which a government seeks to control international trade for the purpose of protecting local businesses or employment from foreign competition (Krugman et al, 2012).
A Tariff is a tax which is levied on imported goods. Tariffs on goods increase their price in an economy and can be specific or ad velorum i.e. a proportion of the value of the good against which a tariff is raised. Tariffs impact on the welfare of market participants can be considered in the context of small countries (where foreign export prices cannot be affected) and large countries (where they can), the outcomes for which may be different. In small countries where tariffs are introduced, importing economies experience increases in imported goods and the price of substitutes manufactured locally, reducing consumer surplus. However, producers from the same economy will observe the ability to increase product price resulting in a producer surplus in addition to an increase in output (to meet revised demand, and consequently increased profit). Governments which implement tariffs receive associated revenue. The net impact for an economy of implementing a tariff is equal to the net gains or losses of tariffed good manufacturers, consumers and the government. The net effect is made up of a negative production efficiency loss, and a negative consumption efficiency loss. In a large country, where it is assumed there are two participants and one is larger than the other, whilst the tariff effects will be broadly similar for market participants to those of a small country, there may be a positive or negative net impact may result and thus there is a possibility for improved national welfare (Krugman et al, 2012).

Quotas can be defined as a restriction on the volume of imports. Thus limits are set on the import quantity of a particular good. As with tariffs, these can be applied to specific items or across a sector. In small importing countries (as defined above), product consumers in are negatively impacted by quotas as the consumer surplus is reduced by increases to prices of imported goods and local substitutes. Producers benefit as an increase in their product prices increase the industry surplus in addition to their output, and an overall improvement to underlying profitability. Recipients of quota rents may be the government, a domestic industry producer or passed to a foreign economy. The net welfare impact for the importing economy is the net of consumers, producers and quota rent recipient gains and losses. The net impact constituents include negative production and negative consumption efficiency losses as with tariffs in a small country. As only negative elements exist the net national welfare impact will be negative and thus a small country will experience a negative impact from quota implementation (Feenstra, 1992).
In a large country (where there is the capacity to influence prices), it can be assumed for the purposes of illustration there are two participants in trade and one is larger than the other. Under these circumstances the consumer and producer impact for an importing economy will be identical to a small country, as will the benefit to the domestic economy of quota rents. The net welfare impact for the importing economy is the net benefit to consumers, producers and quota rent recipients. If it is assumed quota rents are not passed directly to an external economy, the net impact will have three elements: an improvement to the terms of trade and a negative impact on production and consumption (Feenstra, 1992).

Subsidies can be defined as payments made to producers which may be passed to consumers to reduce the price they pay in a market (Krugman et al, 2012). In small countries, consumers will not be impacted by a subsidy as there will be no associated changes to the price. The producers of goods will experience a benefit through a producer surplus which also drives an output increase. However, the government must pay the subsidy which must be funded. As the subsidy cost will exceed producer benefits, the net impact to the economy will be adverse. In addition, there would be a reduction to the efficiency of production (Boudreaux, 2011).
In large countries, product consumers in the importing economies employing subsidies experience wealth increases because price decreases of imported goods and substitutes goods manufactured in the same economy increase consumer surplus. However, goods producers will suffer a reduction to their wealth due to export subsidies due to a price decrease of their products in the domestic market reducing their producer surplus, also contributing to a reduction in output and profit and. As payments must be made by the government for the subsidy, participants within the domestic economy will experience a reduction in wealth. The net welfare effect for the economy is the net impact to consumers and producers. The impact will comprise deterioration to the terms of trade and a negative impact to consumption production. Therefore, import subsidies can be said to result reductions to national welfare for large importing countries (Boudreaux, 2011).

Other protectionist instruments include voluntary export requirements and local content requirements. The former is where two countries agree that one will limit the export of specific goods to the other for an agreed period. The latter is where a foreign company is required to incorporate components or materials within its products that originate from the country it is exporting to (which for domestic producers this functions in the same way as import quota) (Krugman et al, 2012).
Motives for protectionism
There are a number of motives for governments to implement protectionist measures. However, it is also the case that there are a number arguments as to why a majority of these can be considered deleterious to the general wealth of a country (Harrison, 1995).
One argument for the protection of domestic industries is that demand increases for domestic goods and services, which will in turn increase output and employment in the domestic economy (Cripps & Godley, 1976). However, contrary to this it can be argued protectionist measures impose welfare losses on consumers and may result in increasing the inefficiency of a business receiving protection. In addition, it may result in retaliatory measure being implemented by other countries and thus reduce exports, offsetting the gains achieved in output and employment for the country implementing the protection measures (Fouda, 2012).
In circumstances where there is a balance of payments deficit, it has been argued that protectionist measures can assist in reducing or eliminating a balance of payments deficit. However, such an approach would not remove the fundamental cause to the deficit which is likely to be as a result of a lack of competitiveness within an economy (Rothbard, 2011).
In cases of structural employment, protectionist measures implemented to defend an industry have been posited as a solution to prevent potential increases in unemployment in the event of foreign competitors eliminating competitive advantage (Costinot, 2009). However, this has been challenged on the basis that whilst it may reduce the incomes of foreign competitors it increases the likelihood of inefficiency in the industry it is designed to protect (Sennholz, 1985).
Another argument for protectionism is that at an early point of development, an infant industry might require protection from foreign competition (O’Sullivan & Sheffrin, 2003). However, it is almost impossible to identify potentially successful infant industries and bearing the risks of financing infant industries is the function of the entrepreneur. Entrepreneurs will finance infant industries when they believe they will be successful in the long term. If they are not prepared to do this the prospects for success must be thought poor (Baldwin, 1969).
Finally, a protectionist motive is that it is considered desirable to produce certain essential goods, such as food and energy domestically, rather than become dependent on another country for their supply. In these circumstances, supply might be withheld to exert political pressure (Proedrou, 2012). A recent example of a supplier of a good threatening to withhold supply is in the conflict in Ukraine whereby Russia has threatened to withdraw the supply of natural gas if the Kiev government does not stand down in its pursuit of defeating rebels in the East of the country (Ukraine Today, 2014).
Conclusion
In conclusion, whilst there are theoretical bases for introducing protectionist instruments, these would only benefit large countries under theoretical conditions which may not exist in the real world. Furthermore, whilst the use of such instruments may be advantageous in specific circumstances related to a countries size on a net basis, real-world evidence suggests that there is a benefit to all countries irrespective of size when trade barriers are removed.

References
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