Trade Policy and Price-Based Barriers

According to trade theoretic standpoint, in the aftermath of policy reforms, the exporting sectors of a country may expand production, while the import-competing sectors will witness a downslide. However, in real world, the threat of competition from cheaper imports is considerable threat for local players, particularly the small and medium enterprises (SMEs), who may take recourse to lobbying. The argument is that imposition of tariffs on the import-competing sectors would enhance their production and consequently ensure higher returns to the factors most intensively used therein. It may also enable them to reach the economies of scale in their production. The persistence of relatively higher manufacturing tariffs in several countries during the GATT period and the subsequent WTO regime can be explained by the deep influence of the optimal tariff argument on their policymakers. The other policy instruments, e.g., offering subsidy to local players for protecting them, or implementing a weaker environmental standard that can lead to lower compliance requirement, have also been discussed at WTO frequently. While the welfare consequences of any trade policy intervention might vary across countries, depending on the strength of their natural or acquired advantages, excessive recourse to protectionism can lead to trade distortions and dead-weight losses.