Final answer:
Protectionism is considered 'second-best' because it tends to be less effective than more direct policies, as it can cause higher prices, inefficiencies, reduced global cooperation, and less innovation.
Step-by-step explanation:
Economists regard protectionism as a 'second-best' policy because it can be less effective and more disruptive than other more direct policy solutions. The concept of protectionism revolves around shielding a country's domestic industries from foreign competition. Here’s why economists believe protectionism is 'second-best':
- Promoting economic growth: Protectionist measures can lead to higher prices for consumers and inefficiencies in the market. They divert resources away from more competitive industries and can result in retaliation from other countries. Economies generally grow faster with open trade that allows for specialization and comparative advantage.
- Ensuring global cooperation: Protectionism can breed conflict and diminish cooperation between nations. It goes against the idea of international trade agreements and may cause others to erect their own trade barriers in response, leading to a reduction in global trade.
- Correcting market failures: Market failures are better addressed through direct policies, such as regulations or taxes that target the specific issues. Protectionism, while it may aim to protect certain industries, often causes overall economic costs that exceed the benefits.
- Encouraging innovation: The pressure of international competition is a key driver for innovation. Protectionist policies can decrease these competitive pressures, resulting in less innovation and a slowdown in technological advancement.
In summary, while protectionism aims to protect domestic industries, it comes with significant economic drawbacks and missed opportunities. More direct policy instruments are usually available that can address issues without undermining the benefits of global trade.