Protectionism
A tool to bolster industry or a crutch for weak producers?
What’s the Point?
Protectionist policies are typically used by developing nations to protect nascent industries against developed foreign competition. They are intended to allow domestic producers to develop their manufacturing capabilities, provide job security to workers in the targeted industries, or establish minimum standards that products must meet to be sold into the domestic market.
So How’s it Work (in Theory)?
Protectionist policies typically include levying tariffs, setting import quotas, establishing minimum quality or safety standards, and subsidizing industry. Protectionist policies which create trade barriers allow domestic industry to develop by either making foreign competition more expensive or by limiting the supply of foreign goods.
Tariffs are a tax on imported goods, by levying tariffs foreign goods are made more expensive. When foreign products are more expensive, then smaller domestic producers can afford to price their goods competitively while making a profit, which in turn allows them to grow. Setting import quotas, limiting the number of imports or banning foreign products outright has a similar effect to levying tariffs. Limiting imports makes foreign goods more scarce, raising the prices making domestic prices more competitive, raising the profits of domestic producers and stimulating production. Banning imports entirely eliminates competition, in this case domestic producers can price their goods as high as they wish, allowing them to maximize profit and, again, grow. Product standards on the other hand set minimum standards which goods must meet to be sold in domestic markets. Similar to import quotas, product standards can limit the number of imported goods.
Though subsidies are protectionist policies, they have different effects than tariffs, limiting imports, or product standards. Subsidies allow domestic producers to price their goods competitively by providing government funding or substantial tax incentives (like the 2022 CHIPS Act). As a result of these policies, producing domestically becomes more affordable, allowing domestic producers to lower their prices to be more competitive with foreign goods.
In Reality?
Though protectionist policies may sound good in theory, when implemented they tend to cause more harm than good in reality. They may have positive effects in the short term, boosting employment and bolstering domestic industry, but in the long term protectionist policies tend to hurt both consumers and businesses. Long term protectionist policies tend to raise prices for consumers and weaken domestic businesses. Isolated from foreign competition, domestic industry stagnates and product quality drops. This limits domestic producer’s ability to compete in foreign markets, and makes them even more dependent on protectionist policies.
Though generally protectionist policies are agreed to have negative effects both on consumers and producers, the effects of subsidies are more debated. Pro-subsidy economists argue that subsidies can bolster industries, create jobs, and increase the supply of goods and services to the optimal level, resulting in economic equilibrium. Anti-subsidy economists, in contrast, argue that the free market should decide if businesses succeed or fail, and that subsidies are an inefficient allocation of resources, preventing the economy from achieving its natural equilibrium.