[PDF Notes] Why Protection Method is Important in Economy Policy?

Protection is used as method (a) to influence a country’s relations with other countries and (b) to influence the domestic economy. International objectives of protection include improving terms of trade and achieving favourable balance of payments.

Domestic objectives include industrialisation, diversification of industries, increasing employment, removing domestic distortions, increasing government revenue and other non-economic objectives.

It should be noted that protection is only the second-best method of dealing with domestic objectives. While dealing with the domestic objectives, the following implications of protection are to be kept in mind.

(i) Protection is not possibly the first-best method to achieve the domestic objectives. It is necessarily the second-best policy because it not only helps correcting distortions in the domestic economy, but also introduces distortion of its own (i.e., a consumption cost).

The first-best method is that which directly deals with the domestic objectives and does not have undesirable side effects of protection. Thus, protection is inferior to a more direct method; tariffs and quotas which protect the industries are inferior to subsidies which promote industries.

(ii) In practice, however, the second-best policy of protection is preferred to the direct measures due to political and administrative considerations.

(iii) While imposing a protective tariff, the additional distortions which this tariff introduces must be weighed against the distortions corrected by it.

(iv) A small tariff is better than free trade because gains due to correcting the distortions are larger than the additional distortion in the form of consumption.

(v) A moderate-to-large tariff may be either better or worse than no tariff at all.

Leave a Reply

Your email address will not be published. Required fields are marked *