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Protectionism can be described as the economic policy that restrains trade between states using techniques such as imposing tariffs on imported goods, restrictive quotas as well as other government regulations aimed at discouraging imports in an attempt to prevent foreign dominance in domestic markets. The protectionism policy is a sharp contrast with the free trade policy that is characterized by minimum barriers to trade and movement of capital. In an economic context, protectionism refers to policies or doctrines aimed at protecting domestic businesses and workers by imposing restrictions or regulating trade with other countries.
History of protectionism
In the historic context, protectionism was associated with economic theories such as mercantilism and import substitution. One economist at the time, Adam Smith warned against interested sophistry where he described the economic outcome of industries seeking to gain advantage at the consumer's expense. According to Maggie, economists argue that the costs of protectionism policies outweigh the benefits (Maggie, 1976). Despite this, protectionism policies in developing countries are typically motivated by the desire to protect the livelihoods of politically important domestic industries. In recent times, there has existed a heated debate relating protectionism policies to offshore outsourcing and loss of white collar jobs.
There are various policies that have been found to achieve protectionist goals. One of the policies is imposing tariffs. Typically tariffs are imposed on imported goods. This implies that the rate of tariffs or taxes is dependent on the type of good. Import tariffs lead to an increase in the price of imported goods since it increases the cost of importers to import goods into the country. This goes on to lower the quantity of imported goods in the domestic market. Export tariffs are also applicable in an economy through the technique of floating exchange rates. However, export tariffs are seldom applied since they are perceived to hurt the local industries.
Import quotas are other economic policies that can achieve the protectionist goals. The economic effect of import quotas is closely related to that of the tariffs. The introduction of import quotas reduce quantity and hence increase the market price of imported goods. The only differentiating factor of import quotas form tariffs is that the tax revenue gains from tariffs are instead distributed to those who receive import licenses. Most economists often argue that import licenses be auctioned to the highest bidder or that equivalent tariffs be imposed in place of import quotas.
Another method of implementing protectionism is by the introduction of administrative barriers. "Governments sometimes use various administrative rules regarding food safety and environmental standards as a technique to impose barriers to imports" (Econ Journal Watch). Another government technique to implement protectionism is through anti- dumping legislations. The argument behind anti-dumping legislations is that these policies prevent dumping of cheaper foreign goods that would otherwise lead to the closure of local markets. However, in a practical context, anti dumping legislations are meant to impose trade tariffs on foreign importers.
Government subsidies in the form of cheap loans or lump sum payments are sometimes given to local firms and industries to increase their competitive advantage with foreign imports. These subsidies are meant to protect local jobs as well as help the local industries adjust to world markets. Other forms of subsidies may include export subsidies that are intended to increase exports. Export subsidies are the direct opposite of export tariffs. In these, exporters are paid a percentage of the value of their exports. The idea behind export subsidies is to increase the amount of trade in an economy with floating exchange rates so as to have similar results as the effects of import subsidies (Darhos, 2002 pp.36).
Countries applying protectionism and effects
In the year 2009, the U.S. slapped tariffs on steel pipe imports from China. This led to a retaliatory action by China when China introduced new barriers on the U.S. and European Union on industrial chemicals. The European Union also responded to the barriers imposed by China by restricting steel pipe imports from China. According to Baghwati, the question is how governments successfully implement protectionism without triggering retaliatory action from the affected country (Concise Encyclopedia of Economics). Given the global economic slowdown, current protectionism polices are seen to exhibit a Smoot- Hawley protectionism.
In recent times, newly imposed protectionism policies like anti-dumping legislations and other safeguard measures increased by 31% in the first half of 2009 despite this, many governments take up to a year to effectively implement such protectionism policies after receiving an initial request form a local industry. Current trends regarding protectionism are such that industry requests for new import restrictions increased up to 34% in 2008 describing a rather worrying trend and the need to protect domestic industries. The trend is further complicated by global economic recession.
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It's not just the U.S., China and the European Union that have incorporated protectionism policies in their economy, In the year 2008, Indian companies alone are responsible for up to 25% of all the requests for new trade barriers particularly on industrial chemicals and steel. Indian policy makers have currently imposed more that 20 preliminary import barriers in the country. The burden of protectionism is not uniformly distributed among exporting countries. However, China is the most affected when it comes to protectionism policies. This is as a result of China being an export reliant economy. Despite the increase in protectionism policies in the U.S., China and the E.U., most of these policies are not successful. This is because, the strategy of imposing high tariffs or establishing quotas on foreign imports for the purpose of reducing foreign made goods into the country is a temporary solution to the flood of foreign made goods in domestic markets. The long run, protectionism leads to increased cost of living for the consumers.