BUSINESS ECONOMICS AND ACCOUNTING

Business Economics and Accounting

Business Economics and Accounting

Question 1

If trade is meant to be an 'engine for growth' why do countries adopt protectionist measures? Critically examine whether they are correct to do so.

Introduction

Trade is regarded as an engine for growth of an economy. The concept of protectionism has gained notable attention in stabilizing the local trade industry. Protectionism aims at restricting and discouraging the trade, mainly imports. This results in restricting the free trade policies to control the trade deficit. Countries adopt protectionist measures by putting tariffs and restrictive quotas. These measures are taken to minimize the imports level, while extending the exports level to support the growth of local industry. When too many imports come into the country from abroad, national businesses are harmed. If this factor remains unaddressed, an ever-growing trade gap could ultimately harm otherwise economic conditions (Luff, 2007).

Economists and policy makers say that despite nearly a decade of economic growth, a soaring stock market and low unemployment, the trade deficit is a major economic concern. Some critics of trade policy say that the courtiers are open to exports from other countries. Free trade policies have led to job losses in many countries, particularly in the manufacturing sector (NAO, 2009).

When companies face strong competition from products made in countries where workers are paid low wages, companies are forced to cut jobs or lower wages in order to remain competitive. Those who see the trade deficit in a negative light (including supporters of labour unions and some policy makers) say that the government should make it more difficult for foreign goods to be sold in the country. This result in increasing the demand for imposing protectionist measures to control the increasing trade deficit and protecting the local industry (Marshall, 2010).

Protectionist Measures

Protectionist measures result in imposition of trade barriers, such as added tariffs and quotas on certain foreign goods. Tariffs are special taxes that are levied on imported products, which generally make them more expensive than domestic goods. Quotas are government-imposed limits on the amount of certain imported goods allowed into a country (Luff, 2007). Critics argue that the governments should stop signing trade agreements that lead to a further reduction of trade barriers, because such agreements could cause the trade deficit to grow even larger (Marshall, 2010).

UK Trade and Protectionism

Foreign trade has been an important issue for countries economic stability across the world. Smith argued in favour of free trade between nations, and criticized the use of tariffs to limit trade. However, during much of early UK history, the nation's leaders supported trade policies designed to promote UK industries and limit imports from other countries (Marshall, 2010). During the 1980s, newly industrialized trading partners, including South Korea, Taiwan and Singapore, expanded their share of world exports. By the mid-1980s, the UK trade gap widened as the country lost some ground as a leader in world exports (UKTR, 2006). 

By 1986, UK exports of manufactured goods had fallen to 11.1% of the total, placing it behind Germany and Japan. At the same time, the UK had begun importing an increasing share of the world's manufactured ...