JC Econs Economic Downturn & Protectionism Essay Model Answers
As with all economies, Singapore aims to achieve a high and sustained level of economic growth rate. However, instead of merely duplicating policy options of her trading partners, Singapore has lesser policy options, as we shall examine in the following essay.
For eg, can we use Protectionism Policy, which is the imposition of tariffs on imported goods and services, to recover from an economic recession? Let us see.
Question
(a) Explain how the current global recession would impact Singapore’s economy. [10]
(b) Evaluate the arguments for protectionism in the light the current global economic downturn. [15]
JC Economics – Global Recession & Macroeconomic Consequences for S’pore
Part A Essay:
Refer to full length here: JC Economics Essay Series #15 – Recession in Singapore & Policy Options.
Part B Essay:
It can at least seem understandable that a country would wish to protect it’s citizens in the current downturn, but any arguments in favour of protectionism are even less valid now in the global economy. This was as a result of a combination of unemployment and protectionism. Yes, there are traditional arguments for protectionism, used during more normal economic times. While these scenarios are potentially on-going around the world, the current global downturn is a unique combination of problems, where the immediate protection of jobs lost due to falling world demand is the basic problem.
Thesis:
Arguments in support of protectionism:
1) Protecting Employment via:
a) Protection against dumping
A grey area that can be abused, e.g. US retaliations against Vietnamese catfish farmers whom they wrongly accused of ‘dumping on the US market after taking advantage of a non-market economy in Vietnam, undercutting the local US producers. The effects are a loss of consumer surplus (CS) to local consumers due to the higher prices, but it is also a reduction in choice, which was one of the reasons for trade in the first place.
Limitation:
In a global downturn, there could be an increased incidence of dumping, as suppliers attempt to get rid of excess stocks arising from declining world demand. This could give more grounds for countries to impose anti-dumping measures. This is weighed up against the protection of local jobs but again the advantages of specialisation and trade are negated.
b) Protection of Sunset industries
To Allow Industries to Decline Gradually
Justification: • A country could have lost its comparative advantage in certain industries. Also workers need time to learn new skills / Machines have no use in other industries. In addition, protectionism may prevents the wastage of resources
Limitation:
This is especially so in a global downturn when industries may decline rapidly, resulting in massive loss of jobs. E.g. auto industry in US But for how long should the phasing out period last?
2) Correcting persistent BOP problems
If a country is spending more than it is earning, it can look to reduce expenditure on imports to improve its balance of payments problems. It may have lost its comparative advantage in its export industries, caused by declining relative productivity or technology, or increasing costs.
Limitation:
In a global downturn, the volume of exports and FDI tend to fall, thus aggravating balance of payments problems. Cutting back on import expenditure could be justified as a temporary measure while it restructures, but may again lead to retaliation as the incomes of its trading partners fall as a result. But what was the root cause of the deficit?
3) Guaranteeing the supply of strategic goods
• From a strategic point of view, e.g. in the interests of national defense, should some industries be protected, so that supply is guaranteed when national security is at stake. E.g. oil and water supplies are often the most vulnerable.
. But are they efficient and where do you draw the line at which industries are ‘strategic’ or not?
Limitation:
As this argument has to do with non-economic priorities, the global downturn would have little relevance to it. Or too many claims to many industries that are ‘strategic’, when they are actually not.
4) Protection of infant (sunrise) industries
This is the notion that industries that are newly established, sometimes known as sunrise industries,, are not able to attain their potential economies of scale, because they are competing against overseas firms that have already done so, of which they are likely to be from developed countries. So this argument has more validity for developing countries. Protection for infant industries can be justified if it is removed once the industries are established.
However some problems may be faced:
a) it is difficult to identify which industries will be successful. Misallocation of resources if choice is wrong
b) Protectionism may enhance profits but not due necessarily to efficiency gains.
A specified time of protection or gov’t review could be seen as a solution, or a subsidy put in place of the infant industry may be more appropriate.
Evaluation:
In a global recession when demand is generally falling across the board, the case for protecting infant industries is questionable, as there would be little scope for such industries to grow and acquire the potential comparative advantage.
Side-Effects
– From a short-run, individual country point of view, the various forms of protectionism can protect local jobs by increasing local production, but any arguments for protectionism in the current downturn, need to take into account the following. • Subsidies provide little incentive for firms to become more efficient and have an opportunity cost.
– Tariffs and Quotas result in a loss of welfare by increasing the costs of production and cost of living.
– Export Subsidies distorts market signals . Protectionism negates any benefits associated with specialisation and free trade • Retaliation is likely to result in a downward spiral effect.
– All forms of protectionism result in a loss of overall welfare.
The Importance of Global Supply Chains in the Current Downturn
The dependence on global supply chains has helped allow the rapid increase in trade in the last few decades, but this has also increased the severity of the current downturn. From a global perspective, any argument for protectionism needs to take into account that global supply chains are drastically affected when tariffs rise above a certain point, which may even be below the maximum agreed by the WTO.
Evaluation: which arguments more valid? over short run vs over long run?
Conclusion
The various forms of protectionism being practiced today, could take many years of negotiation to break down, as evidenced by the experience of the years after the Great Depression. As well, the inter-connectedness of world trade means that when a recovery does begin, the flow-on benefits to all countries will spread quicker without protectionism.
In the long-run, protectionism reduces competitiveness, growth, employment and real incomes, and is more important now than in other times, particularly due to the emergence of global supply chains since the 1930’s. Protection imposing countries gain very little, if anything, and only in the short-run. The exports for other countries would be reduced, lowering their incomes and therefore their imports. Retaliation would lead to higher prices of import-competing goods in both countries, thereby reducing domestic consumption and the level of employment in exporting industries in both countries. Protectionism could be justified in the short-run if coming from an individual country point of view, but these short-term gains are inconclusive and would deepen the downturn, slowing down the recovery in the long-run.
Free trade, and therefore the absence of protectionism, has no alternative as a means of improving prosperity and reducing poverty, and is even more important now in the light of the current global economic downturn.
Econs Tuition teacher’s Remarks:
1. The topic on protectionism is not tested for 2021 since it is a CLT.
2. S’pore does not advocate protectionism! Article: SG must resist protectionism
3. More revision and exam skills in our Econs revision lessons.
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