Protectionism is the economic policy of restricting imports from other countries to bolster domestic industries. This article will navigate through the ins and outs of protectionism, explaining its definition and illustrating its operation through vivid real-world examples. We’ll delve into both sides of the debate, investigating the potential benefits of this policy for local economies and industries, while also shedding light on the disadvantages and potential long-term impacts. Embark on this journey with us as we decode the complex world of protectionism.
What is protectionism?
Protectionism is an economic policy where a country imposes restrictions like tariffs, quotas, and subsidies to shield its domestic industries from foreign competition. It’s like putting up walls around the local market, with the goal of supporting local businesses, preserving jobs, and promoting economic stability.
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Free trade and protectionism
Free trade allows the free movement of goods and services, labour, capital, and the exchange of technology and information around the world.
Thanks to free trade, countries can engage in international trade without any restrictions. In theory, countries benefit from the specialisation, movement of resources, and increase in competition that free trade implies. Because of that, there are many advantages to free trade.
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Despite the advantages of free trade, there are some who lose out from free trade.
The main way in which countries lose out from free trade is if their export sector isn’t competitive or loses its competitive advantage. This causes them to lose out from trading and selling their exports, and this has many negative effects on the wider economy. Because of that, many governments choose to implement protectionist policies.
Protectionist policies
As mentioned previously, there are many different protectionist policies a government can choose to implement. Let’s study the two main policies governments usually choose.
Tariffs
Tariffs are also known as customs duty or import tax.
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Imposing tariffs makes imports more expensive than the domestic production of the same goods. Tariffs give domestic producers a chance to compete against foreign goods and services. For the government, tariffs help raise tax revenue. Figure 1 shows how trade tariffs work.
Fig. 1 – Trade tariffs
Figure 1 shows the demand and supply for coffee in Country A. The domestic demand for coffee in Country A is at Q4, while the domestic supply is at Q1. There is excess demand. Thus, to meet this demand, the country imports coffee from foreign countries (Q1 – Q4 is what is imported).
However, domestic firms lose out as they can’t compete with foreign countries that are able to meet the domestic demand for coffee. To help these firms out, Country A’s government imposes a tariff on coffee imports.
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Category: WHY
