International Business

Importance Of Protectionism In International Trade

Protectionism is the rule of the day. The various arguments have been advanced in favor of the policy of protection. Besides those arguments, there are certain other special reasons to explain why an underdeveloped country adopts the policy of protectionism-

1. To Promote Industrialization. Under developed countries need rapid industrialization. They are predominantly agricultural countries and export primary goods to developed countries which are generally used by them as raw materials. But developing Countries lack in capital resources and necessary technical expertise to establish new industries. By importing necessary expertise, they need to develop industries within the country, using the available raw materials which they now export. These imports of end products will be discouraged. But this can be possible only under the policy of protection. Free trade policy cannot protect the new Protectionism is, therefore, indispensable for such countries.

2. To Promote Capital Formation. The rate of capital formation can be accelerated only by adopting the policy of protection to, domestic industries otherwise the rapid industrial growth cannot be expected. Protectionism raises the level of employment and the national income which help in quickening up the process of capital formation. By curtailing imports, the country saves valuable foreign exchange and thus promotes domestic savings which constitute the basis of capital formation.

3. To Check the Deterioration in terms of Trade. The terms of trade (or the balance of payment position) of underdeveloped countries are invariably unfavorable because their imports are much higher than exports side to two express reasons-

(i) They import more in a thrust to speed up industrialization. Generally capital goods, essential consumption goods and technologies are imported by such countries in a way to rapid industrialization.

(ii) They generally export agricultural and basic materials, the value of which has not gone up as fast as the prices of manufactured goods mainly imported by them. This brings in unfavorable terms of trade. The protection policy can improve this situation by restricting imports of non-essential items and promoting exports of domestic goods by manufacturing them on large scale within the country with the raw materials already available in the country.

4. To Attract Foreign Capital. Since the underdeveloped, countries are deficient in capital resources; their economic development is retarded for lack of adequate supply of capital. The policy of protection serves to promote foreign capital investment in country. It tempts the foreign multinationals to invest their fund in setting up new industries within the country to escape protection. Thus, protectionism attracts foreign capital.

The policy of protection plays a crucial role in the industrial development of an underdeveloped country. The Indian case can be cited as an example in this regard. Its economic development is attributed largely to the policy of protection.

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