Protectionism is an attempt by a country’s leader or government to restrict imports or promote exports by imposing tariffs, quotas and other barriers to trade. Protectionism is the opposite of free trade, which is international trade left to its natural course without quotas, tariffs or other restrictions. As international trade continues to expand, economists across the world warn about the dangers of protectionism.
While intended to protect a nation’s economy from international competitors, modern history has shown repeatedly that it always makes the protected country worse off than if it had allowed free trade to proceed unabated. This is not the case with 18th and 19th century history, however, when Europe benefited enormously from protectionism.
The most popular methods of protectionism include **quotas and tariffs on imports, as well as tax cuts or subsidies granted to domestic companies.
** Tariffs are taxes or duties imposed on imported products. A quota is a government-imposed trade restriction that limits the monetary value or number of imported goods.
The protectionist’s main aim is to make domestic businesses and industries more competitive by raising the price of imports or restricting how much can come into the country.
Protectionists may favor the policy for a number of reasons:
– to reduce the trade deficit,
– protect or recover jobs numbers in certain sectors, and
– promote the growth of specific domestic industries.
Over the past decade, protectionism has become closely associated with the anti-globalization movement. The anti-globalization movement is opposed to large, multinational corporations having unregulated economic and political power, exercised through deregulated financial markets and various trade agreements.
Governments have a wide array of economic, financial and administrative weapons at their disposal to achieve their protectionist goals:
– Tariffs: these are taxes and duties imposed on imported goods and services. Rates generally vary, depending on what is imported. Import tariffs push up the cost to importers, and raise the price of their goods in local markets, thus favoring domestic suppliers.
Which country imposes more protectionist measures than any other? Most people would point to perhaps Japan or China. According to a report from Credit Suisse, it is the United States.
– Preferential Government Spending: all government departments may be told to purchase goods and services only from domestic suppliers.
– Quotas: the aim is to reduce the total number of imported goods or their monetary value by imposing a limit.
– Political Campaigns: the government could finance a propaganda program to try to persuade consumers to just buy products and services made at home.
– Administrative Barriers: the protectionist country can easily drown the importer in an ocean of red tape, rules and regulations regarding food safety, environmental standards, anti-trust concerns, special licenses etc., as a way to slow down or stop the importation of goods and services.
– Anti-dumping regulations: the foreign supplier can be accused of dumping – exporting its product at cost or below cost prices in order to destroy competitors abroad or gain market share internationally.
– Exchange Rate Controls: the government or its central bank may artificially reduce the value of its currency, thus making exports cheaper and imports more expensive. This policy only works over the short-term, because a cheaper currency is usually followed by higher inflation.
– Export subsidies: money is given to exporters in order to reduce the price of exports.
– Direct Subsidies: money is given to the domestic suppliers that are struggling in the global market.
The vast majority of economists say that protectionism, over the long term, is bad for the country that imposes it, as well as for its people.
Protectionism in the United States
The United States appears to be closing a 2-centuries-old circle which started with the Tariff of 1816 and ended in 1945, and now appears to be starting again with President Trump. From 1816 to the end of World War II (1945), America had a de facto protectionist policy.
In 1945, when virtually all of its major competitors had been wiped out by the Second World War, the US opened up to a free trade policy.
Over the past year, beginning with presidential election campaigner Donald Trump and then President Trump after he won the elections, America appears to be on the verge of raising that protectionist wall again.
US Presidents Theodore Roosevelt (1858-1919), William McKinley (1843-1901), Abraham Lincoln (1809-1865), and George Washington (1732-1799) were all strong advocates of protectionism. They were proponents of the American School of economics, also known as the ‘National System’, which was the American policy to varying degrees from the 1860s to the 1970s. Protectionists believe that there is a legitimate need to impose restrictions on free trade in order to protect their nation’s economic and political independence.
Many economic and political commentators say that President Trump will not be able to raise the walls of protectionism for a number of reasons:
– Retaliation: if he did, other countries would retaliate. It would soon become clear that the US would suffer enormously in an international trade war against the rest of the world. Consequently, President Trump would change his mind and back off.
– The Republican Party: President Trump represents a party that believes strongly in the market economy, which includes free trade. Many lawmakers in his own party will try to stop him from going ahead with a protectionist policy.
Ludwig Heinrich Edler von Mises (1881-1973) was a theoretical Austrian School economist. He wrote and lectured extensively on classical liberalism. He is best known among economists today for his work on the study of human choice and action – Praxeology. (Image: vonmisesinstitute-europe.eu)
– Automation: President Trump made a promise during his election campaign that he will be unable to keep. Many of his voters were blue-collar workers from America’s **Rust Belt. He told them that their jobs had been exported and that he would bring them back with import tariffs and other protectionist measures.
** The Rust Belt, in the US, is a term for the region from the upper Midwest States to the Great Lakes which have experienced economic decline, urban decay and population loss due to the contraction of its once-powerful industrial sector.
Alan Greenspan is an American economist who was Chairman of the Federal Reserve of the United States from 1987 to 2006. He has the second-longest Fed tenure in US history, behind William McChesney Martin (1906-1998). In February 2007, he forecast a possible recession in the US either before or in early 2008. Within a day of making that comment, the Dow Jones Industrial Average lost 3.3% of its value – falling 416 points. (Image: thefamouspeople.com)
What he did not tell them was that the vast majority of manufacturing jobs in America – and the rest of the world – have been disappearing for a number of reasons, including automation.
Automation is advancing at breakneck speed, and there is nothing he can do about that. The Rust Belt is not only an American problem – it is a global one – and no matter how how much he embraces protectionism, he will not be able to bring those jobs back. Even in Germany, Japan and China – the countries he accuses of stealing American jobs – blue-collar manufacturing jobs are disappearing because of automation (robots).
Video – Why do governments enact protectionism?
If the vast majority of economists say free trade is better for a country’s economy, why are there nations erecting barriers and embracing protectionism? This Mindlever Education Centre video explains why certain governments have decided to restrict imports.