Protectionism
Protectionism
Have you ever wondered why it’s harder to move to another country and start working there than it is to move from one town to another? One major reason is protectionism.
Economists and other influential voices disagree about whether protectionism is a good idea.
Arguments in favor of protectionism
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Protecting local employment: By limiting the number of imports into a country, the government can protect employment levels and reduce job losses.
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Preventing unfair competition: Large brands sometimes struggle to protect their patent rights internationally. As a result, similar products may be sold at much lower prices because they are not the original product. Governments may block these goods from entering their economies because they could damage the market for genuine products.
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Improving the balance of payments: An economy may try to reduce imports to limit damage to its balance of payments. If imports rise too much, the balance of payments may become negative.
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Helping growing industries: When an industry is new, it may not yet produce the same quality as established international competitors. Foreign firms can take advantage of this and dominate the local market. If consumers can buy well-known products at lower prices, they may avoid products from new local firms. To prevent this, many countries limit the number of imports they allow to protect these “infant” industries.
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Protecting declining industries: When an industry is declining, the government may introduce protectionist measures to give it time to restructure and recover before foreign firms take advantage of its weakness.
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Raising revenue: Some imported products remain in high demand even when tariffs are imposed. Governments may use tariffs on these goods to raise revenue each time the products enter the country.
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Preventing dangerous goods: Governments may restrict imports of dangerous goods such as addictive drugs and guns, especially in countries where civilians are not allowed to carry or own firearms.
Arguments against protectionism
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Retaliation: Many countries use some form of protectionist policy. A common concern is retaliation: if one country introduces protectionist measures, other countries may respond with their own restrictions. This can cancel out the original benefits of protectionism.
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Less competition and lower quality: When local industries do not face competition, they may become less efficient. Over time, this can lead to lower-quality products and higher prices.
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Misallocation of resources: Protectionism can prevent workers from moving to where their skills are most needed. For example, a country might have an excessive number of IT personnel. If protectionist policies limit movement and opportunities, those workers may remain unemployed even though they could contribute in other economies.
Methods of protectionism
Countries use several methods to protect domestic producers from external competition.
These methods work by either increasing the cost of imports, limiting their availability, or making domestic goods more competitive.
Tariffs
By increasing the cost of imports, tariffs make imported goods more expensive and help protect domestic producers.
Example:
If an importer brings in goods worth $20,000 and the tariff rate is 20%, the importer must pay an additional fee. This increases the importer’s costs. When the goods are sold locally, the importer usually charges a higher price to recover the tariff cost. As a result, imported goods become more expensive than local goods, which helps protect domestic producers.
Quotas
By limiting the quantity of imports, quotas restrict supply and reduce competition for domestic industries.
Example:
Many countries set limits on the number of cars they will import from China and Japan. This measure can help protect infant industries.
Hidden restrictions
By making importing more difficult, these measures discourage foreign goods from entering the market without directly banning them.
Think of a time you stood in a long queue for a process and eventually left because it felt slow, demanding, or unnecessary. A similar idea can apply at borders: if importing becomes too time-consuming or complicated, some importers may reduce or stop importing altogether.
Government subsidies
Governments can support local producers by giving subsidies such as grants or incentives. These reduce production costs, making locally produced goods cheaper. By lowering production costs for domestic firms, subsidies make locally produced goods more competitive.
Cheaper local goods can make imports seem expensive by comparison, reducing demand for imported products.
Reflection
This encourages you to think about real-world trade patterns and imbalances.
Ask yourself one question in whatever country you are studying: how many exports does your country make to China? You may be surprised when you compare that to the number of imports from China. This highlights how difficult exporting can be when foreign markets are already supplied with cheaper products.
Regional and international trade arrangements
Some trade arrangements reduce barriers between countries and can affect protectionism across multiple nations.
These arrangements aim to encourage trade by reducing restrictions, although they may still apply protectionist measures to non-member countries.
Trade agreements
These agreements reduce or eliminate trade barriers between participating countries.
Example:
A country in Africa might agree with a country in Europe to remove some or all trade barriers.
Free trade areas
These are formed when geographically close countries agree to remove trade barriers between them.
Example:
If the United States agreed with Mexico and Canada, that region would become a free trade area because of proximity.
Customs unions
These extend free trade areas by introducing common external tariffs on imports from non-member countries.
Example:
If countries in North America agree to charge the same tariffs on imports from China or any other country, they act together as a group.
One reason governments do this is to prevent trade diversion, where goods blocked from one country enter through another member country and then move across borders within the free trade area.
Zimbabwe has currently been hit by the same external tariffs from European and American countries since its independence in the 1980s. This means it cannot trade with certain European or American countries on some or all products.
Single market
This builds on a customs union by allowing the free movement of factors of production, including raw materials and labor.
Economic union
This represents a deeper level of integration where countries also adopt a single currency.
Example:
A major example is the Eurozone in Europe, which has operated under these terms for decades.
However, even with these benefits, it does not necessarily mean there will be no problems, as seen with Britain exiting the arrangement in recent years.