Protectionism

Definition

Protectionism refers to government policies and actions designed to restrict or limit international trade in order to protect domestic industries and jobs from foreign competition. It is a trade strategy that aims to shield a country's economy from the effects of foreign competition.

5 Must Know Facts For Your Next Test

1. Protectionism is often justified as a way to save domestic jobs and industries from unfair foreign competition, but it can also lead to higher consumer prices and retaliation from trading partners.
2. Protectionist policies can take the form of tariffs, quotas, subsidies, or other trade barriers that make imported goods more expensive or less accessible.
3. The infant industry argument suggests that new, domestic industries should be temporarily protected until they can become established and competitive, but this rationale is often criticized as outdated.
4. Protectionism can have negative effects on international trade, leading to reduced economic efficiency, higher consumer prices, and potential trade wars between countries.
5. Governments often face a tradeoff between protecting domestic industries and maintaining open, free trade that benefits consumers and the broader economy.

Review Questions

• Explain how protectionism can be viewed as an indirect subsidy from consumers to producers.
  • Protectionist policies, such as tariffs or quotas, raise the prices of imported goods, effectively transferring wealth from consumers to domestic producers. Consumers pay higher prices for protected goods, while domestic producers benefit from reduced competition and can charge more. This indirect subsidy allows less efficient domestic firms to remain in business, but it comes at the expense of consumer choice and higher prices.
• Discuss the potential effects of protectionism on jobs, wages, and working conditions.
  • Protectionism is often justified as a way to save domestic jobs, but the reality is more complex. While it may preserve some jobs in protected industries, protectionism can also lead to job losses in other sectors that rely on imported goods or face retaliation from trading partners. The impact on wages and working conditions is also mixed, as protected industries may be able to maintain higher wages, but consumers may face higher prices and reduced purchasing power. Overall, the net effect of protectionism on employment and working conditions is highly dependent on the specific circumstances and the broader economic context.
• Evaluate the main arguments in support of restricting imports and the potential tradeoffs of trade policy.
  • The primary arguments in support of protectionism include the desire to protect domestic jobs and industries, the infant industry argument, and the need to address unfair trade practices by other countries. However, these arguments must be weighed against the potential downsides of protectionism, such as higher consumer prices, reduced economic efficiency, and the risk of retaliation and trade wars. Governments must carefully consider the tradeoffs between short-term benefits to specific industries and the broader, long-term impacts on the economy, consumer welfare, and international relations. Striking the right balance between open trade and strategic protectionism is a complex challenge that policymakers must navigate.

Related terms

Tariffs:

Taxes or duties imposed on imported goods, making them more expensive and less competitive compared to domestic products.

Non-Tariff Barriers: Regulations, quotas, or other restrictions that impede the flow of imports without directly raising their prices.

Infant Industry Argument:

The idea that new, domestic industries should be temporarily protected from foreign competition until they can become established and competitive.