Discuss the extent to which protectionism can help developed nations to correct the balance of payments problems arising from the emergence of developing nations.           


Students are expected to provide detailed illustration of how various protectionistic measures, such as tariff and quota, can be implemented by developed countries to correct the BOP deficit. Adequate limitations of such measures in correcting BOP deficit must be discussed, especially the issue of loss of CA by developed nations. Students are to provide some alternative policies that developed economies can adopt to tackle the issue of loss of CA and be able to arrive at a reasoned judgment on whether protectionism is the appropriate measure to adopt  to correct a BOP deficit due to the emergence of developing economies.

Identify the problems:

  • Developed nations loss their CA due to the emergence of developing nations. With abundant resources, hence lower factor prices, manufactured goods from developing economies are relatively price competitive than those from developed nations. The fall in demand for the latter exports has led to a fall in export revenue and increase in import expenditure (purchase of cheaper imports from developing economies by domestic consumers), resulting in current account deficit.
  • Similarly, the relatively lower costs of production in developing nations have attracting many FDIs from developed nations, causing capital outflow hence capital account deficit.


  • Illustrate how the use of tariffs and quotas can be used to correct current account deficit , &/or
  • Use of ERP (devaluation) to improve export competitiveness


  • Limitations of using protectionistic measures
  • Retaliation by trading partners might lead to a fall in export revenue of host country
  • Not solving the root cause (loss of CA) such as depletion of resources and inefficiencies. Hence, inefficient firms have no incentive to restructure to improve the competitiveness of the products
  • May harm export competitiveness due to the increase in costs of production for firms that are dependent on imported resources or intermediate goods
  • Unable to resolve the outflow of FDI due to loss of CA as protectionistic measures mainly target imports to protect domestic industries, rather than preventing the outflow of capital. Instead, protectionism will inevitably lead to inefficiencies and higher costs of production, which discourage FDI. The increase in capital outflow will worsen capital account, making efforts to correct BOP deficit counterproductive.
  • Propose alternative solutions that target CA:
  • FP (government subsidies) to restructure economy in finding new niche industries (attract FDI)
  • FP (supply-side) retraining to improve labour productivity and support niche industries (improve export competitiveness and attract FDI)
  • FP (infrastructure development) to improve efficiencies so as to lower costs of production (improve export competitiveness and attract FDI)
  • Relax immigration policy to expand labour force (lower labour cost – improve export competitiveness and attract FDI)

(Limitations of each measure must be provided)

Conclusion: Judgment

While use of protectionistic measures is effective in correcting BOP deficit in the short run, are unable to solve the issue of the loss of CA. The use of such measures could be counterproductive as it impedes efficiencies and might lead to a more severe BOP issue in the long run. Hence, the use of appropriate supply-side measures would be a better solution albeit more time is needed for these measures to make a positive impact on the economy.

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