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Political Arguments And Rationale Behind Trade Intervention

1640 words - 7 pages

The following essay aims at highlighting and analyzing the main political arguments for trade intervention and the rationale behind this.
Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).
Political arguments for trade intervention are mainly concerned with protecting the interests of certain groups at the expense of other groups. Most of the time domestic firms benefit from this, while customers suffer the consequences.
One of the most cited arguments for intervention is that of protecting jobs and industries from unfair foreign competition (Hill). While industries like aerospace are protected given their importance for national security, job protection appears as a result of unions and industries putting political pressure given the threat of more efficient foreign firms (Hill). Many countries achieve this by increasing the tariffs on imports of foreign products. What really happens when a certain industry is protected is that the demand for home produced goods increases as the price of the import goods rises. As the consumption increases, so does the employment, but it is important to note that the new jobs in the protected industry are created at the expense of decreased employment in other industries.
Quantitative restrictions seem to be more harmful for the economic efficiency than tariffs as they raise the price of different products that consumers pay for by restricting supply (Nigel). Supposing that domestic wages are higher than those abroad and the labour productivity is considerably higher in the home country than abroad, it follows that the domestic cost of labour would be lower (Salvatore). This measure would reduce domestic unemployment by leading to the substitution of import with domestic production. Most economists suggest that tariffs do not reduce unemployment at all. As mentioned above, if governments aim at increasing employment in certain industries, tariffs are not the best option. Subsidies to production or employment seem to be more suitable in terms of creating welfare (Appleyard 2010).
When it comes to protecting certain industries, criticism around this argument arises manly because the support...

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