TRADE PROTECTION AND ECONOMIC WELFARE
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). One of the common strategies a government uses to
protect local firms is through implementation of policies that favor internal firms while
disadvantaging foreign markets. Mostly, trade protection is meant to enhance 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. On the other hand,
unprotected trade results to wealth creation for societies and helps 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.
Carbaugh (2014) points that domestic firm protection is more important 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) may squeeze profitability of domestic firms and this mostly can have a
negative impact on developing states. For instance, international trade and FDI may inhibits
domestic firms from investing in cost-reducing capital and technologies (Sussangkarn, 2011).
The best solution to address this problem is by seeking loans for investments. However, the
capital markets in developing states may not be able to give the required loans, forcing the
domestic firms to depend on retained earnings to fund their investments. To facilitate this, the
governments protect the domestic firms to boost their prices and profitability, and their
investments in capital and technologies (Hill, 2013). Consequently, protection enables the firms
to realize advantages of cost-reducing technologies and attain efficiency. When governments
remove the trade barriers, these firms are already prepared to face international competition
It is worthwhile to note that in countries that adopt trade protection, their economic
welfare can be greatly affected. To understand this, consider Laissez-faire which is a policy that
allows people to pursue their events within the limits of law and order and respect property rights
(Porter, 1990). Productive capacities are 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.
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 are
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. There is also a challenge exporting state’s numerous cultural
diversifications that may be required when conducting external trade (Herrmann, 2015).
Therefore, importation and exportation of products is not easy and this may render governments
to encourage and 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 that does not adopt
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 (Carbaugh, 2014). 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
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).
This essay 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. The benefits of trade protection touch on
agriculture, manufactured products and various fields of production. This essay serves as
documented work in which individuals interested in fields of trade may use as an essential
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Brewer, L., 1993. Government policies, market imperfections, and foreign direct investment.
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Carbaugh, R., 2014. International economics. Australia: South-Western Press.
Dreyfuss, R. C., 2011. The law and theory of trade secrecy. Cheltenham: Edward Elgar.
Dunning, J., 1988. The eclectic paradigm of international production: a restatement and some
possible extensions. Journal of International Business Studies, pp. 1-31.
Falck, O., 2011. Industrial policy for national champions. Cambridge: MIT Press.
Herrmann, C., 2015. Trade policy between law, diplomacy and scholarship. Cham: Springer
Hill, C., 2013. International business: competing in the global marketplace. New York:
Krugman, P. R., 1987. Is free trade passé?. The Journal of Economic Perspectives, Volume 2,
Lenway, S. A. &. M., 1994. The state as the strategist in international business research. Journal
of International Business Studies, pp. 513-535.
Porter, M. E., 1990. The competitive advantage of nations. Harvard Business Review, Volume 2,
TRADE PROTECTION AND ECONOMIC WELFARE 7
Sussangkarn, C., 2011. Foreign Direct Investments in Asia: issues, strategies and prospects.
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