This article is about protectionism. It explains different methods of protectionism and gives arguments for and against protectionism in a country. Finally, the text contains reasons for protectionism and against protectionism.
Methods of protectionism
Countries may prevent free trade occurring by placing restrictions on foreign trade. This can be achieved through the methods detailed below. These policies are commonly known as trade barriers.
1. Tariffs
These are TAXes placed on imports to make them comparatively more expensive than home grown products. It may also allow domestic companies to charge higher prices.
2. Quotas
A physical limit placed on the amount of a good or service which can be imported. Quotas may be enforced or agreed between two countries, e.g. Voluntary Export Restraint (VER) between UK and Japan – Japanese cars imported to the UK can not exceed 11% of previous sales.
3. Subsidies
Governments might decide to give financial support to certain domestic industries, improving their competitive position in either the home or export market. This can be done by giving firms funding or TAX breaks, so that they have lower costs and are more competitive.
However, they must be careful that the industry does not become reliant upon this support. A subsidy will reduce the costs of production leading to an outward shift of the supply curve, represented by the shift of S1 to S2 in the diagram below.
4. Embargoes
These occur when a country refuses to trade with another, often for political or military reasons, and may be just in certain products, not all. Many embargoes were placed on Germany after World War I and in more recent years Iraq, Libya, Cuba, and North Korea have had embargoes imposed upon them by different countries at different times.
5. Administration restrictions
This is a general term for any other interference a government may impose to either prevent imports entering the country or to make local firms more competitive. A government may enforce a policy of ‘buying within’, using domestic companies to supply goods and services whenever possible.
Governments may also enforce limits to the amount of foreign currency that can be bought by either firms and/or individuals. Strict rules may also be enforced on certain goods covering health and safety issues. Such restrictions can lead to a reduction in imported goods such as foods and electronic devices.
Please note, there are numerous other examples that would also be considered administration restrictions.
Reasons for protectionism
Below are reasons why governments may wish to operate protectionist measures and policies.
1. Starter industries
Starter industries are sometimes referred to as ‘infant industries’. Developing industries will not have the established economies of scale that comparative foreign industries possess. Costs may be higher, and the experience and skill of labor lower, proving to be another problem reducing the industry’s competitiveness.
Those who support the protection of infant industries argue that in the long run it can benefit competitiveness as barriers can be removed once the industry has matured to international standards. The South Korean government originally protected LG, Samsung, Hyundai and other companies, which have since become some of the world’s largest companies.
2. Revenue
Keeping out foreign business will naturally increase or maintain turnover levels of domestic companies. If an industry is in its infancy, higher revenues can help it to develop more quickly.
Other side effects are that the government can counter recession and guarantee a higher level of job protection. Industries unable to compete with foreign markets will suffer decreased demand.
3. Protecting local jobs
In addition to protecting local firms and their revenues, governments can also successfully safeguard employment for the domestic workforce.
4. Anti-dumping
Dumping means selling a good in another country at a very low price, normally below its cost of production. Firms or governments may choose to dump goods for the following reasons:
- To earn foreign currency.
- To get rid of excess stock. In recent years, European Union (EU) accused China of attempting to dump textiles and in the 1990’s the USA fined several European countries for dumping steel.
- To destroy competitors in foreign markets by pricing them out to create a monopoly.
5. Counter ‘unfair’ competition
Dumping is not the only way to ‘unfairly’ enter a market. Some countries have significantly lower labor costs, e.g. in Southeast Asia. They can use this as a means of gaining a foothold in markets and pricing out domestic businesses.
6. Demerit goods
The desire to keep demerit goods out of the economy can lead to protectionist measures. It is illegal to import alcohol into Saudi Arabia. These goods are addictive and, in the government’s view, would be over-provided if left to market forces.
7. Strategic reasons
Some economies are comparatively small and may rely on one particular industry to sustain themselves, e.g., Barbados relies heavily on sugar refining. Alternatively, the Balance of Payments, which is the difference between imports and exports, may need improving. Finally, a government may wish to protect its currency.
Reasons against protectionism
Below are the reasons governments may wish to avoid operating protectionist measures and policies:
1. Retaliation
If one country introduces protectionist measures, then others will follow in order to avoid being disadvantaged.
2. Less choices
Protectionist measures either keep out or greatly lower demand for foreign goods. Removing competition ‘unnaturally’ from the market will lower consumer choice and sovereignty.
3. Inefficiency and higher prices
Protectionism reduces competition, reducing the need to save costs and maintaining higher prices. Tariffs particularly can increase prices as domestic companies increase their margins pushing prices closer to foreign companies forced levels.
4. Reduced world output
Companies have less desire to enter foreign markets and consumers have less demand, therefore worldwide aggregate supply will fall, damaging economic growth and stability for all. Another side-effect of protectionism is that consumers will have less choice.
Summary
Protectionism can take various forms such as TAXing foreign products or more extreme measures like preventing their sale.
There are numerous reasons for introducing protectionist measures, such as protecting an emerging economy while it is young or avoiding unfair competition.
However, in the long run protectionism will be damaging as output lowers, prices are higher, and consumers have less choice.
