Protectionism

Updated on January 31, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Protectionism Definition

Protectionism in economics is a governmental restriction on international trade. It is an attempt to protect domestic manufacturers and industries from international competition. Sometimes tariffs and quotas are imposed as a safety measure.

Protectionism

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If most finished goods come from overseas, the domestic economy suffers; in such scenarios, governments adopt protectionism. Trade restrictions receive criticism from economists. Most theorists strongly favor free trade.

Key Takeaways

  • Protectionism refers to international trade restrictions initiated by a country’s government. It is an attempt to boost domestic economic activities. It can potentially protect local producers from stiff international competition.
  • Restrictions are imposed in the form of tariffs, quotas, and subsidies. Governments use restrictions to ban or regulate international trade. This way, domestic businesses get a boost.
  • In the long term, trade restrictions tend to backfire. The negative impacts of isolationism far outweigh the benefits.
  • Economic theorists strongly advocate free trade. Even so, free trade can harm flourishing economies, invariably leading to job outsourcing.

Protectionism in Trade Explained

Protectionism policy is an economic stance where a government imposes trade restrictions to balance competition and boost the domestic economy. For example, governments use quotas, subsidies, tariffs, etc., to execute diplomacy to restrict imports or exports.

Such strategies can be seen throughout history. They are especially common during wars, recessions, and economic crises, as they are considered regressive measures. Most economists like the idea of free trade and globalization. Yet, free trade can harm capitalist economies—due to job outsourcing.

Protectionism

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During the 17th and 18th centuries, European monarchies took a restrictive stance to increase domestic growth. But the move backfired—business relationships with surrounding regions diminished. It is a reminder notice that protectionism does not always yield in practice fits. Even in the modern era, many economies impose extensive trade restrictions. On the other hand, economists have supported free trade and industrialization unequivocally. They condemn trade restrictions.

Some countries need these restrictions—to protect domestic manufacturers from foreign competition. Even so, such a stance only helps domestic economies in the short run. The absence of competition can also result in the stagnation of quality. This is why such diplomacy tends to backfire in the long run. If restrictions are imposed for a longer period, negative impacts outweigh the benefits.

Sometimes these restrictions do not make too much sense from an economic standpoint. The move could be politically motivated—in that case, it would lead to isolationism.

Isolationism is an advertent or inadvertent alienation of a country from its neighboring states. Robust economies need international trade to sell the excess goods and services produced. Similarly, isolation can make a state vulnerable to military attack.

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Protectionism Tools

Trade restrictions are broadly classified into four protectionism tools

#1 – Tariffs

Protectionism in trade is majorly influenced by tariffs imposed by governments on certain products and services. For example, if a domestic product is more expensive than the imported alternative, then the government imposes tariffs on imported products.

This gives domestic manufacturers much-needed breathing space. This way, the sale of domestic products increases, and imported alternatives find fewer takers (due to the inflated prices). In the long domestic manufacturers must have to enhance efficiency and productivity.

#2 – Subsidies

Governments introduce subsidies to help domestic manufacturers make quality, subsidized products become competitive and can go toe-to-toe with products in the international market. This way, the government helps local businesses boost their income, sales, and revenue.

#3 – Quotas

Governments set a designated amount—goods exchange is not allowed beyond the stipulated quantity. For example, a country can limit the quantity of grain that is imported from outside. Once the threshold is flanked, imports will be barred.

Import Quotas

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Example

In 2020, the COVID-19 pandemic was at its peak. As a result, many countries like India, Germany, China, and the U.S. banned the international export of medical equipment and accessories (especially critical care supplies).

The U.S. was the first to issue medical and critical care equipment protectionism policies. The government barred companies like 3M from selling overseas. In such scenarios, restrictions make total sense. One part of the country is trying to look out for the other parts of the same country—mutual help.

Many countries tried to use protectionism to maintain supplies—even at the cost of letting down neighboring allies.

Protectionism

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But demand within a country started soaring. Supply could not keep up with inflated demand. Countries and citizens alike started hoarding masks, ventilators, and medicines.

This stance drew criticism from disaster preparedness experts, who labeled it as an incompetent emergency response. The experts claimed that it was not a corporate disorder—there was adequate production, but the distribution of supplies was inefficient.

Protectionism vs Free Trade

  • Protectionism is a ban on free trade. In addition, such governments regulate international trade policies. In contrast, free trade is the very absence of those trade barriers—it promotes globalization and increased exchange of goods and services.
  • Restrictions protect domestic manufacturers. On the other hand, in free trade, small businesses from developing countries get access to the international market. This is not always beneficial for flourishing economies. Free trade eventually causes job outsourcing.
  • Measures of protectionism play a crucial role in free trade, which throws domestic manufacturers into the booming competition—they either enhance efficiency or crash.
  • Restrictions are imposed in the form of subsidies, tariffs, and quotas. Free trade is ensured by signing treaties and legal agreements between nations. It is a mutual drive against trade barriers.
  • Most economists condemn protectionism and support free; however, free. Free trade is considered an idealistic veiw.

Frequently Asked Questions (FAQs)

1. What is an example of protectionism?

During the Covid-19 pandemic, many countries banned international export to prevent the spread of the Corona. It was a safety measure to protect the citizens of the local citizens. At the same time, governments made sure that vital supplies were always available.

2. Is protectionism good or bad?

It has a wide scope of advantages and disadvantages. For example, many economists believe such restrictions are not good and restrict economic welIn addition; economists argue that these policies are supposed to protect local manufacturers but do not always achieve that free trade with minimum or no bar sometimes encourages domestic small businesses to participate in the global economy. In doing so, the industry is forced to come out of its slumber—rapid growth. More often than not, trade restrictions end up harming the very entity it is meant to protect.

3. Why do countries use protectionism?

Countries use it for the following purposes:
– To elevate the domestic economy.
– To ensure the consumption of domestic goods and services.
– For the efficient utilization of the existing workforce, natural resources, and employees.

This has been a guide to Protectionism & its definition. Here, we explain its tools, example, and comparison with free trade. You can learn more about it from the following articles –

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Comments

  1. Lewis says

    Very educative and precise. It enjoyable when reading.

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