Protectionism is defined as the practice of shielding the industries of a country from foreign competition. There are several ways to enforce such a practice, such as enhanced border security, product subsidies, and enhanced import inspection.
The theory of protectionism, however, is usually implemented through the use of tariffs.
The overall goal of protectionism is to limit competition for products domestically, allowing local businesses to succeed by creating higher prices for imported goods. It may also be combined with subsidies for local businesses which make local products cheaper.
The pros and cons of protectionism take a look at the balance of protecting local workers and businesses while still encouraging free trade practices whenever possible. Here are some of the key points to reflect upon.
List of the Pros of Protectionism
1. It can encourage local job growth.
In the U.S., labor outsourcing occurs because international wage standards are often lower than they are domestically. The average salary of an IT worker in India, for example is around $15,000. In the United States, a worker with similar responsibilities would earn about $60,000 per year. Protectionism can prevent some of those jobs being outsourced to cheaper labor, which stimulates the local economy in numerous indirect ways.
2. It protects new industries.
Protectionism can guard new domestic industries from international established competition. It gives these businesses a chance to grow when they might struggle to do so under true free-market conditions.
3. It reduces economic gaps.
Free trade does provide benefits for everyone. The only problem is that the people who have the most money typically benefit the most from such an economic structure. By instituting protections on domestic goods and services, it becomes possible to reduce gaps in income and resource inequality that occur.
4. It reduces national deficits.
The United States has seen their trade deficits with China reach record highs in 2017, reaching $375.2 billion, according to The New York Times. In the previous year, the trade gap with China was $347 billion for the United States. Globally, the U.S. experiences a trade gap of $556 billion. By implementing protectionism policies, consumers in a strong economy will still prefer domestic goods over imported goods because of the cost comparisons that experience at the point-of-sale. Domestic sales limit imports, which reduces national deficits in trade that occur.
5. It can enhance national security.
In some ways, the diversity of open borders can help an economy to thrive with fresh ideas and new perspectives. In our current age, however, open borders are also an invitation for security concerns. By creating policies which focus on protectionism, the borders of a nation become more secure. That makes it more difficult for those with nefarious intent to carry out their plans. In return, the general population feels more secure and engages in activities which benefit the economy.
6. It corrects international subsidy imbalances.
Let’s say that Mexico is subsidizing fuel prices for manufacturing companies that produce shoes. When coupled with the cheaper wages available in the economy, the price of shoes from Mexico, sold in the United States, are $10. In the U.S., because those subsidies are not available and there are higher wages to be paid, the price of the exact same shoes is $30. Although protectionism cannot account for wage imbalances internationally, it can correct for the subsidies to create fairer competition for domestic products that are more expensive.
7. It generates revenues for the government.
Protectionism generates revenues, through tariffs, that are used to fund government operations. Billions of dollars are generated annually because of the existence of customs excise taxes and tariffs. In 2017, the United States earned a total of $44 billion through protectionism policies.
List of the Cons of Protectionism
1. It often raises prices instead of lowering them.
Competition is typically what keeps prices down for consumers. When tariffs are implemented, foreign goods cost more. Companies don’t pay for the added taxes – the consumers do. Domestic companies often raise their prices to match the price increase of foreign goods to boost their profits. For consumers, even if they experience wage increases, they don’t gain anything because those increases are wiped out by higher prices.
2. It limits customer choice.
When free trade policies are allowed to flourish, consumers are presented with a wide range of goods and services from which to choose. Protectionism limits these choices because international goods may not be supplied to the local market. If they are supplied, then tariffs may price those goods or services out of the reach of the average consumer. That means consumers must often use inferior products or have access to them during specific time periods each year.
3. It only creates short-term gains.
When one country announces tariffs on products, this practice is quickly followed by other nations following suit. That means the gains experienced domestically through protectionism are short-term at-best. Many companies may even find the cost of business to be too high for them with tariffs in place. Jobs that rely on exports are often lost when escalating tariffs occur. When one country closes its borders, many others follow suit.
4. It exposes educational deficiencies.
Protectionism can also limit immigration and visa approvals. When this occur, service gaps begin the form in the economy. In the United States, many high-skill jobs are filled by immigrants. There are domestic shortages in the U.S. right now in several different sectors, including science and engineering, because there aren’t enough people educated in those disciplines locally.
5. It can lower the quality or quantity of products for consumers.
One way to get around the issue of tariffs is to change the export product or service being provided. Offering fewer of the same product or lowering its overall quality can keep pricing at acceptable levels for the consumer. That means the only losers in this scenario are the consumers, who must either make-do with fewer items or settle for an inferior product compared to what they used to enjoy.
6. It may inspire warfare between nations.
When protectionism occurs, it is often referred to as a “trade war.” Real wars are more likely to start because of protectionism as well because there are fewer opportunities for different nations to help each other find success. Countries are far less likely to go to war with one another when their economies are dependent, in some way, on the products and services that are provided because of free trade.
These protectionism pros and cons show us that when this type of policy is implemented with targeted goals and precision accuracy, it can be beneficial to local industries. The problem with protectionism is that when it is not appropriately implemented, the results could devastate the domestic economy.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.