hi everybody we know from my last video that protectionist policies are barriers to trade in order to protect domestic firms from foreign competition but in this video we want to Target why why do domestic firms need protecting from foreign competition what are the reasons for protectionism we're going to go through some very common reasons evaluating them as we go but very powerfully we're going to link these reasons to the Tariff diagram that we also covered in my prior video so really make sure that you've watched that prior video you understand this diagram in high detail to help you get through this video Let's dive in well a very common reason for protectionism is the infant industry argument yes using protectionist policies to allow small infinite Industries in a country to grow in size to produce more output to develop economies of scale crucially to then become more internationally competitive without that threat of global competition the idea is once these firms are competitive with more established Industries overseas that already have large economies of scale the protectionist measures can be taken away this is a way to diversify an economy and to allow a wide range of Industries to prosper in a country and diagrammatically we can see that a tariff for example that increases the price of imports or increases prices generally here can encourage more domestic output from q1 to Q3 and there's your link to higher business growth to Greater economies of scale which can then support the infinite industry argument but to evaluate this the risk with using protectionism to try and improve competitiveness is that it can do the opposite if firms are given something on a plate without really deserving it it can promote complacency and inefficiency over time as costs elsewhere in the business increase so maybe over time businesses don't become more competitive they become less competitive and less productive this is a genuine concern so for this argument really to hold it's important that businesses are monitored when protectionism is enacted and also that protectionism isn't endless that there is an end date to it to make sure that we actually get the fruits of this reason the other risk is that of retaliation yes foreign countries not liking their exports being the target of protectionist policies to allow arrival countries infant Industries to grow in size no so it's likely that foreign countries could retaliate and enact their own protectionist measures back on this country's exports and the end result of that is infin Industries won't be able to grow enough in size if they can't export that good to the rest of the world limiting the benefit of this argument another reason for protectionism is to protect against dumping dumping is one a good as sold overseas at a price below cost of production which could then destroy overseas Industries this is an illegal trade practice but it still happens commonly around the world so naturally if a country feels like goods are being dumped in their country they're going to want to stop that and a way they can do that is through protectionism like a tariff that increases the price of imports and hopefully takes away that dumping Advantage the problem with this reason though is that to do it properly you need to prove that goods are being dumped in your country you've got to collect evidence to prove it and then file a case through the World Trade Organization they should adjudicate and hopefully come on your side in your favor and then in sanctions on the country that is dumping but often countries bypass the World Trade Organization it's hard to collect evidence and often it takes the World Trade Organization a long time to come to an end conclusion so by bypassing them you're asking for one potential sanctions from the WTO if you're wrong and actually there isn't dumping that's been taking place but also you're risking retaliation from countries that won't like the allegations of dumping another very common reason for protectionism is to protect against unemployment we know that with free trade Industries without the comparative advantage simply will not be able to survive or die away and with that you'll see a rise in structural unemployment and all the problems that are created from that for the economy but also for the individuals that will be unemployed so to prevent that happening protectionist policies like a tariff that encourage more domestic output so here from q1 to Q3 can not only save jobs maybe even create jobs as labor is a derived demand that's the the Theory anyway the problem with this argument is that if the industry is chronically uncompetitive and lacks a comparative advantage protectionist measures might just be delaying the inevitable like eventually the industry is going to die away anyway it's a natural process so would it be better for the government instead to uh enact training programs put into place training programs or relocation programs to allow workers to gain new skills and to move to jobs that are more safe in the economy instead an interesting argument not to argument if there is dumping if there is dumping then no don't let the industry die away that's ridiculous you've got to fight to make sure that it's survives from that dumping uh practice but no under normal circumstances without a comparative advantage are we just delaying the inevitable with protectionist measures but also the worry of retaliation if foreign countries retaliate and impose their their own harsher protectionist measures back more jobs could be lost as a result of retaliation than save from the initial protectionist measures protectionism can take the form of Standards like health and safety standards product safety standards environmental standards worker standards so countries can enact these for the first time or raise standards as a protection's measure the point is to protect key stakeholders right consumers workers the environment Society at large but you can't just do this willy-nilly otherwise it will just be another block to Imports another general form of protectionism you need to prove through the World Trade Organization that the standard is necessary or that the raise in the standard is necessary without that you can be sanctioned by the WTO or you can face heavy retaliation from your trading partners protectionist policies like tariffs of course raise government revenue we know that as area h on our diagram and this is a very useful source of revenue for developing countries because it's easy to collect and also can be in very high sum useful to fund uh key development spending on education on Health on infrastructure welfare Etc and for developed countries the revenue can be very useful to further help domestic producers out for example by funding subsidies to them but elasticity is crucial so if demand and Supply domestically are both priced inelastic it means Imports are not going to be squeezed very much which means more government revenu is going to be collected but more elastic domestic Supply and domestic demand will mean that Imports come down a lot and that restricts the amount of government revenue collected and lastly a very common reason for protectionism is to reduce a current account deficit the argument is super simple impose a tariff we see this squeeze of imports now to only Q3 Q4 and cetus parab is crucially so assuming that export Revenue stays the same that's going to help reduce a trade deficit reduce the current account deficit going further maybe increase xus m in the ad equation boost ad and boost economic growth yeah that's all Theory the easy evaluation to that is questioning that cetra parabus assumption there is no way your export revenue is going to stay the same because foreign countries will not accept this reason for protectionism they will not accept the attack on their exports for another country to reduce their current account deficit so retaliation is very likely meaning for the initial country their export revenu is likely to Fall by more than that import expenditure Falls by so more likely you're going to see a worsening of the trade deficit and a worsening of the current account deficit overall you've also got elasticity as already mentioned inelastic domestic Supply domestic means the import reduction won't be that big but let's finish this video guys now by looking at more General evaluation points to protectionist policies well very simply we can worry about the market Distortion from policies like tariffs and quotas that raise prices and reduce quantities we see the higher price from PW to PW plus T the lower consumer surplus of EFG h& I that's the overall consumer surplus loss the dead weight loss of area I as we covered in my previous video and also just the lower quanti from Q Q2 to Q4 is very clear on the diagram and this is terrible news for consumers who struggle with affordability their living standards can reduce their quality of life can reduce uh as they struggle to access these key Imports now at higher prices but also tariffs can be regressive they take a greater proportion of the income from lower income households than they do from higher income households widening inequality which is an undesirable side effect but also the lower quantity just restricts consumer Choice the this also harms businesses right if tariffs are placed on the Imports of raw materials it can drive up cost of production for firms which worst case can lead to business bankruptcy or at least can reduce profit margins the lower quantity can restrict access to key materials too maybe impacting on the quality of the final good sold we've already mentioned this retaliation concern but boy the risk of retaliation is very very high it's unlikely that foreign countries are going to accept the initial reasons for protectionism so the the risk of retaliation is strong retaliation is likely to be harsher than the initial protectionist measures the end result of that is we end up with a trade war between countries tit fortat back and forth protectionism where all the other issues of protectionism listed here get worse but also the initial reasons as we've seen already will tend not to hold so that's a very strong evaluation point the irony with Point number three protectionism is supposed to help domestic firms but could actually end up harming them one way is if protectionism is imposed on the Imports of raw materials that drive up cost to production for firms or restrict key access for firms maybe driving them out of business as a result of that but also if these firms are randomly targeted through retaliatory protectionism they're dragged into a trade War where their export revenue is hit very hard it's another way they can be hurt significantly so if that's the case actually more harm could be done to domestic firms than actually benefit via protectionist policies great evaluation there could certain protectionist policies and the way they've been put in place be breaking WTO rules as we've considered could then countries be sanctioned as a result of that nice evaluation we know the allocative inefficiency of policies like a tariff and also a quota area G on this diagram is the allocative deficiency that will take you back to comparative advantage of distortion and then higher prices and lower quantities the cost of certain protectionist policies like subsidies can be very high could be a long-term drag on government finances with negative consequences over time and we've already mentioned the importance of elasticity in determining whether current account deficits will come down and determining the level of government revenue collected so there you have it guys reasons for protectionism yes with evaluation but also General great evaluation points of protectionism it's a fascinating debate thank you so much for watching this video hopefully you found it interesting can't wait to see you in the next one [Music]