An Overview of Trade Protection, Its Causes and Effects

Introduction

The purpose of trade protection is to protect the domestic firms from foreign competition thereby enabling these firms to gain efficiency and effectiveness in their production processes. The protection is more vital in developing nations in which the infant/new firms are allowed to grow and expand their scale of economies adequately to face foreign competition when trade barriers are removed (Baumol, 2012). The policies are set by the governments that favor internal firms and tight for foreign markets. The benefits of trade protection are based on enhancing the economic welfare of the state. For instance, through internal trade protection, the security of agricultural products is enhanced, and this positively enhances the economic welfare of a nation. However, unprotected trade results to wealth creation for societies other than helping to lift population masses from poverty (Brewer, 1993). This essay discusses reasons for governments to protect their domestic firms, the essence of practicing trade protection and covers the effects of trade protection on the economic welfare of the state.

Trade Protection and Economic Welfare Enhance

The element of domestic firm protection is more of essential in developing countries. The governments of these states may protect their domestic firms as a way of stimulating one-time efficiency gains for infant firms. The development and trade researchers argue that protecting domestic firms stimulate dynamic gains in efficiency and effectiveness. This is achieved by firms realizing productivity gains and strive at learning directly about efficiency (Carbaugh, 2014). In spite of company managers understanding in theory the way to attain high efficiency, they fail to make the quantum leap to it. Rather, the managers "learn by doing" as they put much focus on inefficiencies then eliminating them later. As a way of protecting these firms, the governments impose trade protection so that their domestic firms get the adequate time they require in learning by doing as a way of correcting inefficiencies. These governments believe that by protecting the domestic firms, their growth can be enormous since the practical experience of domestic firms may be compromised by other sources of efficiency such as external economies of scale (Dreyfuss, 2011).

In line with competitive pressures, the combination of international trade and Foreign Direct Investment (FDI) is capable of squeezing profitability of domestic firms. The effect is more of concern in developing states. This inhibits the domestic firms from investing in cost-reducing capital and technologies (Sussangkarn, 2011). The remedy may be seeking loans for the investments. However, the capital markets in such developing states may not be able to give the required loans, forcing the domestic firms to depend on retained earnings as a way of funding their investments. As a way of facilitating this, the governments protect the domestic firms to boost their prices and profitability, and facilitate their investments in capital and technologies (Hill, 2013). Consequently, protection enables the firms to realize advantages of cost-reducing technologies and attain efficiency. When these governments remove the trade barriers, these firms are already prepared to face international competition (Dreyfuss, 2011).

It is worthwhile to note the effects trade protection has on the economic welfare of those countries trade protection practice is adopted. For instance, growth in productive capacities is believed to be ideally fostered within an environment, in which the population is free to pursue its interests. In this scenario, trade protection through government policies of laissez-faire would be ideal for providing a good atmosphere for increased state's wealth, allowing domestic firms to boom up and consequently enhance economic welfare of the state. Laissez-faire is a policy that allows people to pursue their events within the limits of law and order and respect property rights (Porter, 1990).

An aspect of trade protection is essential in reducing problems caused by import and export processes. Trade protection allows infant domestic firms to grow to attain adequate economies of scale strong enough to withstand competition from international markets. Domestic trade protection does not involve trade activities to be carried across national boundaries (Falck, 2011). Thus, the problems experienced during importation and exportation of products is minimized. For instance, crises such as requiring deals to be only transacted in foreign languages, foreign law customs and regulations frees domestic firms from these traumas. Additionally, obtaining information from specific firms required for external trade to be carried out may be difficult. Exporting state’s numerous cultural diversifications that may be required when conducting external trade all explain problems associated with import and export trade (Herrmann, 2015). These complications render governments to encourage and, therefore, support domestic firms. Since the domestic firms do not export, the state maximally utilizes its resources thereby enhancing its economic welfare.

Agriculture is the backbone of many nations. It’s rare to find a nation not adopting any form of agriculture. A state that does not practice agriculture, in spite of having large pieces of land is less likely to compete in terms of resource accumulation against those nations that extensively engage in agriculture. Therefore, agriculture is directly related to the economic welfare. Bio-safety is taken into consideration in food and agriculture, as it assess and monitors the possible bad impacts of gene flow competitiveness and the impacts of transition of agricultural products across international boundaries on agricultural animals and plants (Carbaugh, 2014). The move of governments to protect trade plays an essential role in enhancing bio-safety and sustainability of agriculture and food security. For instance, the movement of foodborne pathogens from one international market to another is reduced. The BSE, Avian Influenza, and Swine Flu are some of the diseases that are highly transmitted in unprotected trade/open trade in which products flows freely into the state (Falck, 2011). Through internal trade protection, the security of agricultural products would be enhanced, the move that would have a significant positive impact on the economic welfare of a nation.

In line with products, the boost of domestic firms may be facilitated by changing consumer attitudes towards their local products. A population may have a bad perspective towards products from specific states (Sussangkarn, 2011). For instance, in spite of being placed the second largest economy in the world, some of China products are not taken by some states because they are considered to be substandard. Protecting trade in which products that had earlier indicated poor qualities are refrained from flowing into the state would help to build consumer confidence towards products produced within their state. The economy is related to the number of working industries in the state, with the high economy being associated with those states having several industries. Alluring consumers to use their local products through restricting international trade would boost the local firms and this could reflect a high economic welfare of the state.

In light of the positive economic welfare benefits that are associated with internal trade protection, it is worthwhile to appreciate the negative consequences that may arise from this trade protection. There is clear evidence that opening trade results to wealth creation for societies for the purpose of addressing their needs apart from promoting the economic development of the state. When the government erects trade barriers as a way of protecting its internal trade, the citizens and nations are left worse off overall (Dunning, 1988). This can be learned from the United States lesson in which it realized that its imposition of damaging Smoot-Hawley tariffs remarkably affected its trade. As a move to discourage trade protection, the U.S has been in the forefront in encouraging international markets. This action has ignited states to grow quickly and develop apart from raising millions of populations out of poverty. However, much needs to be done to reap the related advantages of unprotected/open trade, especially in agriculture, manufactured products and various fields of production. The developing states are the most likely to benefit from trade protection if there is the breaking of the impasse in international trade negotiations (Lenway, 1994). The World Bank, in its research found that millions of populations may be lifted from poverty in case there is increased trade that can be achieved through open trade (Krugman, 1987).

Conclusion

This essay paper presented reasons governments protect their domestic firms and covered trade protection with respect to economic welfare enhancement of a nation. Trade protection is done to protect the domestic firms from foreign competition. However, this protection is more vital in developing nations in which new domestic firms are allowed to grow and expand their scale of economies before facing foreign competition. There are several benefits of trade protection, some of them which are related to agriculture, manufactured products and various fields of production. This paper serves as documented work in which individuals interested in fields of trade may use as an essential referencing material.