Understanding the Pros and Cons of Protectionism

Anti free trade postcard
Anti Free Trade Postcard From 1910. Corbis via Getty Images / Getty Images

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. This article examines the tools of protectionism, how they are applied in the real world, and the advantages and disadvantages of limiting free trade.

Key Takeaways: Protectionism

  • Protectionism is a government-imposed trade policy by which countries attempt to protect their industries and workers from foreign competition.
  • Protectionism is commonly implemented by the imposition of tariffs, quotas on import and exports, product standard, and government subsidies.
  • While it may be of temporary benefit in developing countries, total protectionism typically harms the country’s economy, industries, workers, and consumers.

Protectionism Definition

Protectionism is a defensive, often politically-motivated, policy intended to shield a country’s businesses, industries, and workers from foreign competition through the imposition of trade barriers such as tariffs and quotas on imported goods and services, along with other government regulations. Protectionism is considered to be the opposite of free trade, which is the total absence of government restrictions on trade. 

Historically, strict protectionism has been used mainly by newly developing countries as they build the industries necessary to compete internationally. While this so-called “infant industry” argument may promise brief, limited protection to the businesses and workers involved, it ultimately harms consumers by increasing the costs of imported essential goods, and workers by reducing trade overall.  

Protectionism Methods

Traditionally, governments employ four main methods of implementing protectionist policies: import tariffs, import quotas, product standards, and subsidies.

Tariffs

The most commonly applied protectionist practices, tariffs, also called “duties,” are taxes charged on specific imported goods. Since tariffs are paid by the importers, the price of imported goods in local markets is increased. The idea of tariffs is to make the imported product less attractive to consumers than the same locally produced product, thus protecting the local business and its workers.

One of the most famous tariffs is the Smoot-Hawley Tariff of 1930. Initially intended to protect American farmers from the post-World War II influx of European agricultural imports, the bill eventually approved by Congress added high tariffs on many other imports. When European countries retaliated, the resulting trade war restricted global trade, harming the economies of all countries involved. In the United States, the Smoot-Hawley Tariff was considered an overly-protectionist measure that worsened the severity of the Great Depression.

Import Quotas

Trade quotas are “non-tariff” trade barriers that limit the number of a specific product that can be imported over a set period of time. Limiting the supply of a certain imported product, while increasing prices paid by consumers, allows local producers a chance to improve their position in the market by filling the unmet demand. Historically, industries like autos, steel, and consumer electronics have used trade quotas to protect domestic producers from foreign competition.

For example, since the early 1980s, the United States has imposed a quota on imported raw sugar and sugar-containing products. Since then, the world price of sugar has averaged from 5 to 13 cents per pound, while the price within the U.S. has ranged from 20 to 24 cents.

In contrast to import quotas, “production quotas” occur when governments limit the supply of a certain product in order to maintain a certain price point for that product. For example, the nations of the Organization of Petroleum Exporting Countries (OPEC) imposes a production quota on crude oil in order to maintain a favorable price for oil in the world market. When the OPEC nations reduce production, U.S. consumers see higher gasoline prices.

The most drastic and potentially inflammatory form of import quota, the “embargo” is a total prohibition against importing a certain product into a country. Historically, embargoes have had drastic impacts on consumers. For example, when OPEC proclaimed an oil embargo against nations it perceived as supporting Israel, the resulting 1973 oil crisis saw the average price of gasoline in the U.S. jump from 38.5 cents per gallon in May 1973 to 55.1 cents in June 1974. Some lawmakers called for nationwide gas rationing and President Richard Nixon asked gasoline stations not to sell gas on Saturday nights or Sundays.      

Product Standards

Product standards limit imports by imposing minimum safety and quality requirements for certain products. Product standards are typically based on concerns over product safety, material quality, environmental dangers, or improper labeling. For example, French cheese products made with raw, non-pasteurized milk, cannot be imported into the United States until they have been aged at least 60 days. While based on a concern for public health, the delay prevents some specialty French cheeses from being imported, thus providing local producers a better market for their own pasteurized versions.

Some product standards apply to both imported and domestically-produced products. For example, the U.S. Food and Drug Administration (FDA) limits the content of mercury in imported and domestically harvested fish sold for human consumption to one part per million.

Government Subsidies

Subsidies are direct payments or low-interest loans given by governments to local producers to help them compete in the global market. In general, subsidies lower production costs enabling producers to make a profit at lower price levels. For example, U.S. agricultural subsidies help American farmers supplement their income, while helping the government manage the supply of agricultural commodities, and control the cost of American farm products internationally. Additionally, carefully applied subsidies can protect local jobs and help local companies adjust to global market demands and pricing.

Protectionism vs. Free Trade

Free trade—the opposite of protectionism—is a policy of completely unrestricted trade between countries. Devoid of protectionist restrictions like tariffs or quotas, free trade allows goods to move freely across borders.

While both total protectionism and free trade have been tried in the past, the results were usually harmful. As a result, multilateral “free trade agreements,” or FTAs, such as the North American Free Trade Agreement (NAFTA) and the 160-nation World Trade Organization (WTO) have become common. In FTAs, the participating nations mutually agree on limited protectionist practices tariffs and quotas. Today, economists agree that FTAs has averted many potentially disastrous trade wars.

Protectionism Pros and Cons

In poor or emerging countries, strict protectionist policies like high tariffs and embargoes on imports can help their new industries grow by protecting them from foreign competition.

Protectionist policies also help create new jobs for local workers. Protected by tariffs and quotas, and bolstered by government subsidies, domestic industries are able to hire locally. However, the effect is typically temporary, actually reducing employment as other countries retaliate by imposing their own protectionist trade barriers.

On the negative side, the reality that protectionism hurts the economies of countries that employ it dates back to Adam Smith’s The Wealth of Nations, published in 1776. Eventually, protectionism weakens domestic industries. With no foreign competition, industries see no need for innovation. Their products soon decline in quality, while becoming more expensive than higher quality foreign alternatives.

In order to succeed, strict protectionism demands the unrealistic expectation that the protectionist country will be able to produce everything its people need or want. In this sense, protectionism is in direct opposition to the reality that a country’s economy will prosper only when its workers are free to specialize at what they do best rather than trying to make the country self-sufficient.

Sources and Further Reading