Analyse_the_Impact_of_Reduced_Levels_of_Protection_on_the_Global_Economy

Protection can be defined as government policies such as tariffs, subsidies and quotas, which give domestic producers an artificial advantage over foreign competition, in order to protect them from international competition. Although protection has many benefits at a global level, reduced levels of protection have various effects on the global economy. Countries may choose to reduce protection in order to increase efficiency and productivity levels, and on a global scale, this leads to international competition. This affects the global economy in both a positive and negative way. On one side, this increases productivity but on the other hand, infant industries will find it difficult to compete against foreign and more established firms without the advantage of protection policies. When trade barriers are enforced, trade flows are redirected rather than created and thus the global economy doesn’t get to take advantage of the benefits of trade. Thus by reducing these barriers and creating trade flows, jobs are created, incomes increase, living standards improve and as a result of countries benefiting from this, the global economy will experience economic growth as the size of a firm’s market increases. Reduced levels of protection leads to a more efficient allocation of world resources due to the effects of comparative advantage. At a domestic level, the productivity of resources increases as a result of this, and in turn this impacts on the global economy, by increasing the productivity of world resources. Protection on the other hand, leads to a misallocation of resources, as resources are being transferred to from efficient industries to inefficient ones and thus reduced levels of this would have a reverse effect. This efficient allocation of world resources would in turn lead to an increased output from these resources, thus increasing total world output or Gross World Product (GWP). This is due to each country engaging in specialisation, as different countries have different resources and have varying factor endowments that allow them to be efficient in the production of a particular good, however, this will also result in increased short-term unemployment. Countries are able to maximise the use of their resources, and thus as a result of the increased links between countries, this affects the global economy, as the changes in one economy affects other economies. Countries then engage in trade in order to obtain goods that either they aren’t able to produce or are produced more efficiently by another country. Consequently by focusing on a specific type or range of good, domestic producers improve efficiency and the global economy in turn benefits from this. Dumping will occur as a result of reduced levels of protection, and occurs when a foreign company charges a price in a domestic market that is lower than the price in the domestic market. Without protection, countries are free to engage in this activity and this can have negative effects on a domestic economy, and thus the global economy may suffer due to this, as domestic industries have no protection against cheaper imports. Even though dumping leads to prices that are much lower than normal, it creates unemployment and interrupts local production. By reducing levels of protection, this increases countries dependence on foreign producers and reduces self-sufficiency for particular good and services. It will also lead to increased competition between firms causing prices to decrease, and thus resulting in higher real income. Increased competition promotes production methods that are innovative and also the use of new technology, creating a more technically advanced global economy. Overall, reducing levels protection of protection has a number of positive and negative effects on a domestic economy, which as a result affects what occurs in the global economy. It increases productivity, improves the allocation of world resources, increases trade, however, and allows dumping to occur. Thus reducing protection is an effective measure that countries should implement because even though they may benefit in the short term by enforcing protection policies, in the long run, there are various other detrimental effects to the global economy.