Sunday 8 February 2009

Does the recession mean that Britain should now adopt protectionist policies?

If you read this you will see that many people suppose that protectionism is almost a suicide for the UK economy and that may sound reasonable.But in my humble opinion we should answer these questions first: 

What is protectionism? 

  • If we google it,we will see that protectionism is "economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies." ©Wiki.

What are the benefits of this policy?

  • Protectionism may help developing industries within the country. Developing industries may not use economies of scale therefore may not be able to provide low prices(compared to foreign companies). So protectionism may make domestic companies be price-competitive.
  • Protectionism may help industries that are in decline, providing incentives for firms to reinvest and revive.
  • Protectionism may increase government's profits from taxes on imports.
  • Reducing imports(as one of the leakages in the flow of income within the country) may boost the AD and therefore may lead to the economic growth.
  • Protectionism may also increase FDI,if foreign companies really think that UK's market is worth it.
  • Protectionism prevents globalisation and therefore may "increase" Cultural Identity. 

What are disadvantages of protectionism(or advantages of free trade)?

  • Theory of comparative advantage. It says that countries that specialise in the production of certain good probably increase welfare of all countries.
  • Increase in consumers surplus because protectionism decrease imports and therefore increase prices.
  • Protectionism also may lead to cost push inflation because firms that import raw materials will have increased costs and therefore will have to increase prices.
  • Protectionism policy may discourage firms to cut costs and therefore be less economic efficient.
  • Free trade may help to establish economies of scale.
  • Free trade encourage competition and therefore lead to greater economic efficiency.

So will that be a help during the recession?

I really believe that protectionism may be a help to the UK's economy,some industries need protection. Tariffs may also be an incentive for firms to enter the market and therefore decrease unemployment and increase aggregate supply. I also think that the Uk's markets are quite attractive for foreign firms so tariffs may also increase foreign investment and that is likely to increase both aggregate supply and demand. So protection of some industries may be help to the UK' economy, but introducing restrictions on all trade is likely to lead to inflation because England do not have enough resources to maintain production so more expensive imported raw materials are likely to lead to an increase in price level. I also think that introducing protectionism policy in some cases is useless because some markets won't be profitable for domestic firms that can not have economies of scale that foreign firms already had. 

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