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Spring Semester 2017
Lazarski University
FACULTY OF ECONOMICS AND MANAGEMENT
Coursework Paper
ANALYZE THE POTENTIAL EFFECTS OF PROTECTIONIST
POLICY ON THE FINANCIAL STABILITY
By:
Program:
Master of Science in International Business Economics – Single Diploma
Module Leader:
Dr. Tomasz Schabek
Module title:
The International Financial System
The deadline:
April 4, 2017
Date of submission:
April 4, 2017
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INTRODUCTION
In economics, protectionism is defined as an economic strategy of restraining trade through the
use of methods such as the restrictive quotas, tariffs on imports as well as other government
regulations (Johnston, 2013). The policies protect the workers, the businesses and the producers
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in the import-competing segment from the foreign competitors. However, the proponents claim
that the policies can lead to unfair trade practices. It is, therefore, important to permit fair
competition between services and goods that are produced domestically and the imports. To
analyze the potential effects of protectionist policy on the financial stability of the country’s
economy we decided to choose such ones as the USA, Argentina, and Venezuela, because they
used such policy in different periods of their existence and have different economic
consequences of it.
THEORETICAL BACKGROUND
Economic protectionism started in the 17th century when the interested sophistry of the industry
was trying to gain an advantage at the consumers’ cost (Johnston, 2013). Some of the countries
that used economic protectionism include Germany, the USA, Great Britain, France and others.
In Germany, the protectionism measures were used with the aim of growing the country’s
industry after the Second World War. In America, economic protectionism was used as a way
of helping the country to switch to the free trade after the Second World War since the industrial
competitors had been swept out during the war.
This type of economic policy is used by governments for the next purposes:
1. Infant industry – according to the national interest, a new industry that possesses potential
proportional advantage may not kick off in any country unless it is issued with a temporary
shield against the foreign competition (Bollen, De Ville, and Orbie, 2016). It is, therefore,
important to embark on economic protection so as to enable the country to develop industries
that it has enough potential to establish.
2. Diversification – it is important for a country to develop a diversified industrial structure for
the economy to be self-sufficient and vigorous. This is because economic dependency on a
limited number of industries subjects the country to many risks. Therefore, it is important to
come up with different industries through the upcoming industries.
3. Enhancing the balance of payment – through the imports restrictions, the nation may have
the ability to improve position regarding the balance of payment since the developing countries
suffer from the shortage of foreign exchange.
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4. Anti-dumping – it is possible for the dominating industrial nation to dump the goods cheaply
in a country thus ruining the local industry. After the dumping, the international industry obtains
the monopoly power and increases the prices for the products thus exploiting the domestic
market. To avoid the dumping effects, it is important for the government to protect the local
industries.
5. Bargaining – imposing tariffs as one of the protective measures acts as a source of bargaining
power for the country to obtain lower duties on the exports.
6. Employment – protection is also used as a measure for expanding jobs and stimulating the
domestic economy. This is because imports restrictions boost the import-competing for industry
and spread the effect thus assisting in the growth of industries. As a result, more employment
opportunities are created.
7. Natural defense – depending on the foreign nations for the protection requirements is very
dangerous since factors such as changes in the political relations may damage the defense
interest of a country. It is, therefore, crucial to come up with industries of intentional importance
through giving protection to the domestic industries.
8. Strategic trade policy – in the developed nations, government co-operation and protection to
the high technology industries such as the semiconductors, telecommunications, and computers
is essential so as to acquire competitive advantage in the technology industry. This is important
so as to prevent market monopolization.
9. Equalization of the production cost – protectionism through imposing the import duties helps
in equalizing the production cost between the domestic and the foreign products thus
neutralizing some of the advantages that the exporter may possess over the local producer about
cheaper labor and lower taxes.
The tools for protectionism include tariffs and quotas (Henn and McDonald, 2014). In economic
protectionism, tariffs play a significant role in protecting the local industries through restricting
trade. Tariffs also help in accumulating the income for the government. On the other hand,
quotas limit what the exporters can sell at the old price. As a result, quotas reduce the number
of foreign goods, increase the prices of the foreign goods and increase the demand for the local
products since they tend to be cheaper as compared to the foreign goods. There are also such
tools as exchange controls, export subsidies and other protectionist measures, including
environmental, health, or administrative standards.
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Like every economic policy protectionism has its strong and weak sides. Among the advantages
we can underline the following:
1. Protectionism helps in creating the sense of patriotism since, through the use of this from
the local industries, the citizens tend to identify themselves based on dependability and quality
of the local products (Thies, 2015).
2. Protectionism gives a foundation to the working class in a country by giving them more
income since the protectionism measures increase the domestic production.
3. Protectionism lowers the rates of unemployment since the local industries look within the
country for the qualified candidates to work for them rather than outsourcing for cheaper service
providers.
4. Protectionism protects the interest of the economy through protecting what the country is
good at.
Some common disadvantages of this economic strategy are:
