Definition
Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are import tariffs, quotas, subsidies, or tax cuts to local businesses. The practice can enhance the domestic sector but may lead to global trade wars and economic inefficiencies.
Key Takeaways
- Protectionism is an economic policy enacted by governments to restrict or restrain international trade. They often do this through methods like tariffs on imported goods, restrictive quotas, and a variety of complex rules which businesses must follow in order to import goods or services.
- One of the main arguments for protectionism is to protect domestic industries from foreign competition. It is typically used to safeguard jobs within a country by making imported goods more expensive and thus less appealing to consumers. However, this can lead to a decrease in economic efficiency and increased prices for consumers.
- While protectionism can provide short-term benefits to the industries being protected, it can also have long-term negative impacts. These can include heightened economic self-sufficiency and inertia, decreased international trade, and potential retaliation by trading partners in the form of equivalent protectionist measures. Thus, while protectionism serves a purpose, there should be a balance to not hinder global economic cooperation and growth.
Importance
Protectionism is a crucial term in finance because it refers to economic policies implemented by governments to restrict imports from other countries in an effort to protect domestic industries.
These can be in the form of tariffs, quotas, or other regulations.
The primary significance of protectionism lies in its capability to stimulate the local economy by encouraging domestic production, reducing competition for local businesses from foreign industries, and maintaining or creating employment opportunities.
However, it can lead to higher prices for consumers and potential trade wars escalations.
Therefore, protectionism plays a significant role in international trade and economic policy decisions.
Explanation
Protectionism is primarily used as a policy strategy aimed at shielding domestic industries from foreign competition. The fundamental purpose is to support and strengthen local enterprises, bolster their survival, and sometimes to protect specific industries that are strategically important for national security.
Governments impose barriers to trade, such as tariffs and quotas, which make foreign goods more expensive and therefore less appealing to consumers. This encourages the consumption of domestically produced goods and services, leading to potential growth and development of domestic industries.
Furthermore, protectionism can be used to preserve jobs and prevent unemployment. When domestic companies face intense competition from imported goods, it can lead to job losses as firms may suffer losses or even face bankruptcy.
Therefore, by protecting these industries it can help to secure jobs within the local economy. A downside, however, is that while protecting a country’s own industries might promote local production and secure jobs in the short term, it may stifle competitive forces and can be counterproductive in driving industrial innovation in the long run.
Examples of Protectionism
United States Steel and Aluminum Tariffs (2018) – The Trump administration imposed tariffs on steel and aluminum imports globally as part of an “America First” economic policy. The idea was to protect domestic industries from foreign competition which could be considered as an act of protectionism. The measure was justified as a matter of national security to protect the domestic steel and aluminum industry.
Chinese Import Restrictions (2001-Present) – When China joined the World Trade Organization (WTO), it agreed to substantially reduce its trade barriers with certain exceptions. Despite this, the Chinese government has continued to use various techniques, such as import quotas and licensing requirements, to limit the number of foreign goods coming into the country. This strategy is designed to protect domestic industries.
European Union’s Common Agricultural Policy (CAP) – The CAP provides subsidies and other protections to EU farmers. Critics argue that these measures are protectionist as they limit competition from agricultural exporters in other countries. The CAP aims to ensure that EU farmers can make a reasonable living while keeping food affordable for consumers.
Frequently Asked Questions about Protectionism
What is Protectionism?
Protectionism is a policy that protects a country’s domestic industries from foreign competition by imposing tariffs on imported goods, restrictive quotas, and a variety of other government regulations.
Why do governments implement Protectionism policies?
Protectionism policies are often implemented to protect new industries against foreign competition and protect aging industries to sustain employment. They may also be used to keep the domestic economy stable and predictable.
What are the benefits of Protectionism?
Protectionism can help new industries grow until they can compete on the global market, and it helps aging industries avoiding layoffs and maintain the stability of the domestic economy.
What are the drawbacks of Protectionism?
While protectionism shields domestic industries, it can lead to a lack of competition, which can lead to higher prices for consumers. Moreover, protectionist policies can lead to retaliation from trading partners.
What is an example of a Protectionism policy?
A common example of a protectionism policy is the imposition of tariffs or taxes on goods imported from foreign countries, making these products more expensive and thus less competitive than domestically produced ones.
How does Protectionism impact the global economy?
Protectionism can lead to trade wars and damage international relations. It can also distort global trade flows and reduce the overall welfare of trading countries. The global economy generally benefits from free trade.
Related Entrepreneurship Terms
- Tariffs
- Import Quotas
- Non-Tariff Barriers
- Domestic Subsidies
- Trade Policy
Sources for More Information
- Investopedia – This site offers a comprehensive resource for understanding topics on finance and investing such as protectionism.
- The Economist – An international weekly newspaper printed in magazine-format and published digitally that focuses on current affairs, international business, politics, technology, and culture. It provides a detailed analysis of world economies including the concept of protectionism.
- International Monetary Fund (IMF) – An organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth.
- World Bank – It is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects.
