The practice of following protectionist trade policies
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What is Protectionism?
Protectionism is the practice of following protectionist trade policies. A protectionist trade policy allows the government of a country to promote domestic producers, and thereby boost thedomestic production of goods and services by imposing tariffs or otherwise limiting foreign goods and services in the marketplace.
Protectionist policies also allow the government to protect developing domestic industries from established foreign competitors.
Types of Protectionism
Protectionist policies comein different forms, including:
1. Tariffs
The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of imported goods in the domestic market, which, consequently, reduces the demand for them.
Consider the following example, which analyzes the UK market for US-made shoes. Due to the imposition of tariffs, the price for the product increases from GBP100 (P1) to GBP120 (P2). The demand for US-made shoes in the UK market decreases (from Q2 to Q4).
2. Quotas
Quotas are restrictions on the volume of imports for a particular good or service over a period of time. Quotas are known as a “non-tariff trade barrier.” A constraint on the supply causes an increase in the prices of imported goods, reducing the demand in the domestic market.
3. Subsidies
Subsidies are negative taxes or tax credits that are given to domestic producers by the government. They create a discrepancy between the price faced by consumers and the price faced by producers.
4. Standardization
The government of a country may require all foreign products to adhere to certain guidelines. For instance, the UK Government may demand that all imported shoes include a certain proportion of leather. Standardization measures tend to reduce foreign products in the market.
Reasons for Protectionism
An economy usually adopts protectionist policies to encourage domestic investment in a specific industry. For instance, tariffs on the foreign import of shoes would encourage domestic producers to invest more resources in shoe production.
In addition, nascent domestic shoe producers would not be at risk from established foreign shoe producers. Although domestic producers are better off, domestic consumers are worse off as a result of protectionist policies, as they may have to pay higher prices for somewhat inferior goods or services. Protectionist policies, therefore, tend to be very popular with businesses and very unpopular with consumers.
Advantages of Protectionism
- More growth opportunities: Protectionism provides local industries with growth opportunities until they can compete against more experienced firms in the international market
- Lower imports: Protectionist policies help reduce import levels and allow the country to increase its trade balance.
- More jobs: Higher employment rates result when domestic firms boost their workforce
- Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in domestic production
Disadvantages of Protectionism
- Stagnation of technological advancements: As domestic producers don’t need to worry about foreign competition, they have no incentive to innovate or spend resources on research and development (R&D)of new products.
- Limited choices for consumers: Consumers have access to fewer goods in the market as a result of limitations on foreign goods.
- Increase in prices (due to lack of competition): Consumers will need to pay more without seeing any significant improvement in the product.
- Economic isolation: It often leads to political and cultural isolation, which, in turn, leads to even more economic isolation.
Related Readings
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FAQs
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.
What is protectionism examples? ›
What Are Examples of Protectionism? Common examples of protectionism, or tools that are used to implement a policy of protectionism include tariffs, quotas, and subsidies. All of these tools are meant to promote domestic companies by making foreign goods more expensive or scarce.
Is protectionism good or bad? ›
Although domestic producers are better off, domestic consumers are worse off as a result of protectionist policies, as they may have to pay higher prices for somewhat inferior goods or services. Protectionist policies, therefore, tend to be very popular with businesses and very unpopular with consumers.
What is protectionism in economics help? ›
protectionism, policy of protecting domestic industries against foreign competition by means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors.
What are 5 reasons for protectionism? ›
The arguments for protectionism include national defense, trade deficit, employment, infant industries, and fair trade. is now accountable to a foreign owner.
What is a real life example of protectionism? ›
One real-world example of protectionism is the European Union's “banana war.” The European Union levied tariffs of €176 per ton of bananas imported to the customs union from Latin American countries.
What are the cons of protectionism? ›
The main arguments against protectionism are outlined below:
- Market Distortion and loss of Economic Efficiency. ...
- Higher Prices for Consumers. ...
- Reduction in Market Access for Producers. ...
- Extra Costs for Exporters. ...
- Adverse Effects on Poverty. ...
- Retaliation & Trade Wars.
Amongst other negative effects, protectionism stifles innovation and competition, reduces consumer spending, and triggers trade wars among nations, leading to stagnation of economic growth. Globalization and trade liberalization are solutions to protectionism.
What is protectionism and why is it bad? ›
Protectionism is a type of trade policy by which governments attempt to prevent or limit competition from other countries. While it may provide some short-term benefit, particularly in poor or developing nations, unlimited protectionism eventually harms the country's ability to compete in international trade.
Which countries are the most protectionist? ›
Number of protectionist trade intervention policies 2009-2023, by country. In the period from 2009 to September 2023, the United States implemented the highest number of trade policy measures deemed as harmful to global trade liberalization, with nearly 9,500 policies.
Differences in Environmental Standards. Another justification for protectionist measures is that free trade is unfair if it pits domestic firms against foreign rivals who do not have to adhere to the same regulatory standards.
Who is protectionism good for? ›
Governments use protectionist policies to counter the negative impacts of free trade. With these policies, governments seek to protect jobs and infant industries from foreign competition which pose the risk of outcompeting local businesses.
Who benefits and who loses from protectionist policies? ›
Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism? Winners: Workers in trade protected industries. Losers: Industries that use trade protected goods as inputs.
How did protectionism cause the Great Depression? ›
Although protectionism did not cause the Great Depression, higher trade barriers exacerbated it and—most important—worked to choke off recovery. Global output returned to its precrisis levels by 1938, but with a trade-to-GDP ratio some 20 percent below that of 1929.
Why is free trade better than protectionism? ›
Free trade emphasizes the removal of trade barriers, promoting economic efficiency and market access. Protectionism aims to protect domestic industries but can lead to higher prices and reduced consumer choice.
What is dumping in economics? ›
Dumping is the intentional mass export of goods to other countries where those goods are sold below the importing country's market price. Dumping is generally considered problematic as its negative aspects are related to the trouble it brings to the importing economy, unemployment, and monopolies.
What are the examples of protectionism in the US? ›
Protectionist measures included tariffs and quotas on imported goods, along with subsidies and other means, to restrain the free movement of imported goods, thus encouraging local industry.
What are the three types of protectionism? ›
Protectionism takes three main forms: tariffs, import quotas, and nontariff barriers.
What does protectionism mean for dummies? ›
Protectionism refers to government policies that shield domestic production (and producers) from foreign competition. For example, a Canadian tariff of 15% on an automobile that costs $5000 in a foreign country means that a tax (customs duty) of $750 will be levied on the car when it is imported to Canada.
Is free trade an example of protectionism? ›
Free trade and protectionism represent two opposing approaches to international trade. Free trade emphasizes the removal of trade barriers, promoting economic efficiency and market access. Protectionism aims to protect domestic industries but can lead to higher prices and reduced consumer choice.
