An important argument for protection in underdeveloped countries is that the policy of protection can increase the saving ratio and capital accumulation in these countries. This is done in three ways:
(i) By imposing the tariffs, an underdeveloped country will improve its terms of trade and thus will make the foreigner pay the duty. In other words, for the same amount of the real resources embodied in the exports, the country will be able to get larger volume of imports.
(ii) Tariffs may be so designed as to attract direct foreign investment. In other words, tariff duties in the underdeveloped countries should aim at not only prohibiting the importation of the finished products, but encouraging the imports of necessary machinery and raw materials.
(iii) Saving ratio in the underdeveloped economies might be increased by imposing selective import restriction to reduce the consumption of certain commodities, such as imported luxuries.
The reduction in consumption of imports is equivalent to an increase in disposable income and this increase may be channeled in capital formation.