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 |
|
Sunset industry |
|
Employment |
|
Current account deficit |
|
Labour/environmental regulations |
|
Consequences of Protectionism
- 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
Diagram: Consequence of Protectionism
Arguments against the use of protectionism measures
- 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