What Is Protectionism? Pros and Cons of Protectionism

Protectionism is a trade policy or collection of trade policies that aim to boost domestic industries and the overall gross domestic product (GDP) by providing advantages to domestic producers or putting in place trade barriers that would disadvantage foreign competition. The protectionist position views the domestic economy as being a state of constant competition with others in the global economy.

The purpose of protectionist measures as part of an economic policy is to bolster the domestic economy by giving domestic producers a comparative advantage in the world economy. Advocates of protectionist policies generally oppose free trade—at least with some trading partners—with the rationale that foreign competitors threaten the success of domestic industries. Therefore, it’s the government’s duty to guide global trade in favor of domestic production.

Protectionists have historically used several tools and methodologies to limit foreign competition at home, including:

1. 1. Import quotas: Import quotas limit the quantity of certain imported goods allowed into the country over a certain period, theoretically allowing domestically produced competition to gain prominence in the market. Governments can use import quotas to bar products from countries whose safety or quality control measures do not meet domestic standards, as detailed, for example, in the General Agreement on Tariffs and Trade (GATT). Additionally, quotas can protect intellectual property domestically by stopping similar competing goods (foreign medication, for example) from entering the market.
2. 2. Subsidies: Subsidies offer aid to producers in a certain industry either directly—through cash payments—or indirectly, in the form of tax breaks and easier access to loans. By giving an edge to domestic firms, subsidies help them outperform foreign companies.
3. 3. Tariffs: Tariffs are a tax placed on foreign goods, either targeted toward a particular country or industry or broadly applied to foreign imports. The governing idea behind implementing high tariffs is that higher prices on imported goods will incentivize consumers to buy lower-priced domestically produced goods.

Protectionism’s proponents typically offer one of several arguments in its defense:

• Counteracting protectionism abroad: Part of the protectionist philosophy is that other countries—even trading partners—implement their own protectionist policies. Protectionists argue that the reality of international economics requires counterbalancing others’ protectionist policies.
• Helping infant industries: The Infant Industry Argument states that new industries can’t survive against the already-established international competition without some help getting to scale. Protectionists claim intervening in the trade balance is necessary to foster innovation.
• Job creation: Protectionists argue that creating trade restrictions and giving advantages to domestic producers create jobs at home and promote economic growth by allowing domestic industries the conditions they need to flourish.
• Remaining competitive: Another argument in favor of protectionism is that in the free market, higher-wage developed countries (like the United States) can’t compete based on price with lower-wage developing countries (like China). As a result, the government must put its thumb on the scale to help the domestic industry compete.

Many economists contend that protectionism is an expensive and ineffective way of boosting the domestic economy and that foreign trade is a net positive. The anti-protectionist position rests on several assertions:

• Effectiveness of specialization: Anti-protectionists argue that a more efficient method of strengthening the economy than limiting international trade is to promote specialization in a few key industries and create mutually advantageous trading agreements with other similarly specialized countries.
• High cost of job creation: While protectionism may save or create jobs at home, it may also slow growth and lead to price inflation as domestic goods get more expensive. The possibility of inflation means any job creation that results comes at a steep cost. According to those opposed to protectionism, a better strategy is to create a system of trade agreements that could benefit all involved.
• Ineffectiveness of tariffs: While tariffs may be effective in the short term, there’s little evidence that they’ve saved a domestic industry in the long term. Meanwhile, the risk of raising the tariff rate is the possibility of a trade war with a country whose goods you’re taxing. The fallout from the Smoot-Hawley Tariff Act in 1930 is a notable example. The act raised taxes on US imports, creating an international backlash that damaged US trade internationally and may have contributed to the Great Depression.
• Realities of the global economy: With globalization and multinational corporations, supply chains often span continents. Therefore, restricting trade between countries can keep producers from getting the supplies they need. Learn more about globalization.
• Risk of violence: Trade wars aside, opponents to protectionism argue it’s led to flat-out violent conflict in the past, like World War I. Europe is at peace partly because of the European Union—essentially one comprehensive free trade agreement that implicitly discourages conflict by linking the various European economies. The World Trade Organization (WTO) attempts to serve a similar purpose worldwide.

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