protectionist-policies-an-introduction

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The Causes & Consequences of Protectionist Policies

Free trade aims to maximise global output based on the principle of comparative advantage
However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
This is called protectionism and may take the form of limiting imports, limiting exports, boosting exports, or putting administrative barriers in place

Reasons Countries Adopt Protectionist Policies

Reason	Explanation
Protect infant firms	To protect new firms that would be unlikely to succeed at start-ups due to the level of global competition. Once established support is removed
Sunset industry	Similar to above, but at the other end of the life cycle, these firms are on their way out, and the government chooses to support them to help limit the economic damage that would occur if they closed abruptly There is a welfare loss as inefficient industries are producing at the expense of more efficient global producers
Employment	When firms outsource production to other countries Or certain industries are experiencing structural unemployment governments will step in to protect jobs
Current account deficit	When imports > exports, the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms Protectionism aims to correct this imbalance
Labour/environmental regulations	Many countries offer cheap labour and low-cost production due to poor environmental regulations Protectionism can help apply pressure to bring about change in these countries

Reason

Explanation

Protect infant firms

To protect new firms that would be unlikely to succeed at start-ups due to the level of global competition. Once established support is removed

Sunset industry

Similar to above, but at the other end of the life cycle, these firms are on their way out, and the government chooses to support them to help limit the economic damage that would occur if they closed abruptly
There is a welfare loss as inefficient industries are producing at the expense of more efficient global producers

Employment

When firms outsource production to other countries
Or certain industries are experiencing structural unemployment governments will step in to protect jobs

Current account deficit

When imports > exports, the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms
Protectionism aims to correct this imbalance

Labour/environmental regulations

Many countries offer cheap labour and low-cost production due to poor environmental regulations
Protectionism can help apply pressure to bring about change in these countries

The consequences of trade protection are evident from the impact that each form of protection has on the stakeholders
- These can be summarised in the diagram below

Reduced choice: Protectionism reduces both the quantity and variety of goods/services available to customers
Increased prices: Protectionism either reduces the supply of goods and services, which leads to higher prices, or in the case of tariffs, directly leads to higher prices
Increased costs: Manufacturers who rely on imported raw materials face higher production costs. If protectionism is widespread, it may generate inflation in the economy and/or lead to a loss of employment
Retaliation: Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures, which further harm free trade
Reduction in export competitiveness: Protectionism reduces the need to be efficient or to innovate. Over time, this leads to higher prices and worse quality products which will reduce export sales
Resource misallocation: Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producers
Domestic inefficiency increases: With a reduced level of competition, domestic firms will be less productively efficient and will spend less on research, development and innovation