Discuss whether the imposition of trade barriers by an economy is the most effective measure in helping domestic industries overcome external competition.    

Intro

The imposition of trade barriers such as tariffs and quotas on foreign goods and services serves to protect domestic industries from external competition brought about by free trade.

However, trade barriers might not be the most effective measure as they do not address the cause of the loss of a country’s competitiveness. Hence, a government might want to explore other measures to efficiently and effectively help these domestic firms face such external competition.

Body

Thesis

With trade, domestic industries face competition from foreign industries. This is especially so when firms from the foreign industry are able produce the same goods at a much lower cost due to the comparative advantage (CA) that they enjoy.

The imposition of trade barriers is useful in protecting firms that are newly-established but have potential CA in the short run. Because they are still in infancy stage, these firms are usually small and hence they tend to produce at a higher average cost, due to inability to reap fully economies of large scale production. As a result, these firms are unable to compete with the larger and more established firms abroad and hence are forced to shut down. If such an industry is protected, it can eventually become big and efficient enough to compete in the world market. In the long run, the protection will be removed when the domestic firms are able to compete internationally.

Import quotas limit the volume or supply of imports by specifying the maximum amount of a foreign-produced good that is permitted into the country over a specified period of time. This reduces the supply of the imported good into the country.  As a result, the price of the imported good rises.

The rise in prices of the imported goods will make domestically produced goods, which are substitutes for the imported good, relatively cheaper. The demand for domestically produced goods will increase, leading to a rise in output, incomes and employment as well.

  1. Although there are some merits to the infant industry argument explained above, it is actually difficult to identify new industries that have the potential to grow big, be competitive globally and contribute to the economy in the long run. Identifying the ‘wrong’ industries for protection may prove to be costly for the country as it leads to a long-term loss of consumer welfare and misallocation of resources.

Anti-Thesis (other better measures)

In order to protect domestic firms, the government might choose to depreciate its currency by selling its currency in the foreign exchange market. Depreciation will result in a rise in price of imports in domestic currency, making imports less price competitive than domestically produced goods.

  1. Foreign countries may retaliate by depreciating their currencies to discourage the exports of the country that depreciated its currency. If so, the result is competitive depreciation that does not help the country overcome the external competition.

The government may implement supply-side policies by offering domestic firms subsidies so as to encourage them to send their workers for skills-upgrading or improve in their methods of production through research and development.

With high-skilled workers and better technology, there will be an improvement in productivity level resulting in a fall in cost of production which will increase the price competitiveness of the goods produced by the domestic industries. The quality of these domestically produced good might also improve, which would reduce external competition as imports are seen as weaker substitutes for the domestically produced goods.

  1. The effectiveness of supply-side policies to reduce external competition is limited in the short run due to the problem of time lag. It takes time to persuade employers and workers of the need for skills upgrading and it takes time for workers to learn new skills. In view of this, the policy of skills training should be on-going to ensure that workers are constantly upgrading their skills to better fit into a rapidly changing economy.

Conclusion

Trade barriers serve as a form of protection for domestic industries when faced with external competition. However, due to its limitations and the possibility of retaliation from trading partners, such measures should be used only in the short run. Thus in order for the domestic industries to overcome external competition, there is a need for firms to constantly upgrade the skills of their workers and technology through supply-side policies.