4.7 - Trade Protection Arguments
The nature of protectionism and reasons for it
Protectionism involves government actions to limit imports, such as tariffs or quotas, to shield domestic industries from foreign competition. While free trade generally boosts a country's overall economic welfare by increasing efficiency and choice, it creates both winners and losers.
Factors leading to protectionist pressures
- Impact on specific groups - When losses are significant for specific groups, they pressure government for protection.
- Incentives for firms - Import-competing firms have strong financial incentives to lobby for protection.
- Political considerations - Politicians often succumb to protectionist pressures due to visible political costs.
- Managed trade approaches - Managed trade may aim to increase exports, benefiting fewer exporting firms significantly while slightly harming many consumers.
Non-economic arguments for protection
Beyond financial reasons, governments may use protectionism to address broader national interests that are not purely economic. These arguments focus on security, public health, and cultural factors, justifying restrictions on certain imports.
Key non-economic reasons for protection
- Strategic self-sufficiency - Ensuring domestic production of crucial goods for security reasons.
- Control of harmful substances - Restricting imports of dangerous or illegal materials.
- Preservation of cultural identity - Protecting local culture.
- Enforcement of safety and health standards - Ensuring imported products meet domestic requirements.
Economic arguments for protection
Protectionism is often justified on economic grounds to support domestic industries, employment, and overall stability. These arguments aim to address perceived weaknesses in free trade, though they come with potential drawbacks. The table below sets out the six most common economic arguments, how each is argued, and how each stands up to evaluation.
| Argument | How it is argued | Evaluation |
|---|---|---|
| Protecting domestic jobs | Cheaper and higher-quality foreign products flood the domestic market, forcing domestic firms to shut down and pushing unemployment up, with cheap foreign labour usually blamed. | Higher domestic wages need not mean higher labour costs, because higher labour productivity can offset them. Where the industry has a comparative disadvantage, resources should move to more efficient uses, and helping displaced workers adjust does more than protection does. Recent research finds people do not move easily to another location even when they have no job, and financial incentives matter less than economists had assumed (Esther Duflo, Nobel Prize 2019), so liberalisation has to be gradual. |
| Improving the trade deficit | A trade deficit exists when spending on imported goods and services exceeds export revenue. Protection makes imports more expensive and less attractive, so import spending falls and the imbalance shrinks. | It invites retaliation, because one country's improved trade balance comes at its partners' expense. It also cuts foreign incomes and so foreigners' ability to buy the country's exports. Above all it leaves the real causes untouched: high inflation, rigid labour markets, poor quality or reliability, and weak design or marketing. |
| The infant industry argument | Temporary protection lets a new industry acquire the know-how and lower the unit costs, through economies of scale, that it needs to meet international competition. Every developed economy and all the Asian export achievers have used it. | Governments find it hard to pick "winners", and protection is fiercely resisted once it has been granted. An industry that never loses it becomes a "perpetual infant": over-reliant on state support, sluggish, and inefficient. |
| Anti-dumping measures | Dumping means selling abroad below the normal price charged at home or below average cost, often because exporters are subsidised. The WTO permits a tariff, known as an anti-dumping duty, where dumping is suspected. | The "normal price" is hard to establish, because it varies by region, by buyer, and by time period. Since duties follow suspicion and the investigation is lengthy, firms can allege dumping simply to buy time to restructure. |
| Generating government revenue | Tariffs raise revenue for the government, which matters most in developing countries whose tax systems collect too little. Points of entry into a country are few, so taxing imports is a practical last resort. | Revenue this dependable cannot simply be given up, so trade liberalisation has to be gradual if the provision of basic government services is not to be interrupted. |
| Promoting economic diversification | A developing country widening its production and export base needs to build a comparative advantage in new areas, and to keep out more efficient foreign producers while it does so. Diversification reduces risk by increasing the variety of goods and services produced and exported. | This is another form of industrial policy, so it depends on the government backing the right new industries and on withdrawing the protection once they are established. |
Arguments against protection
While protectionism offers short-term benefits, it can harm the economy in the long run by distorting markets and reducing efficiency. Critics argue that free trade leads to better overall outcomes through competition and innovation.
Key drawbacks of protectionism
- Reduced efficiency - Breeds inefficiency through reduced competition and increased monopoly power.
- Higher costs for consumers - Raises consumer prices, decreasing purchasing power and demand for other products.
- Increased production costs - Increases production costs for firms using imported inputs.
- Damage to exports - Reduces export competitiveness for firms relying on imported materials.
- Risk of retaliation - Risks retaliation from trading partners, potentially leading to trade wars.
- Limited choices - Limits consumer and business choices, forcing inferior alternatives.
- Barriers to innovation - Prevents access to technological advancements embodied in imported equipment.
Recent developments in protectionism
Recent examples, particularly in the US, highlight the real-world impacts of protectionist policies. Studies show that while free trade provides net benefits, inadequate support for those affected can fuel opposition.
Findings from US tariff studies
- Economic losses - US companies lost more than $1.7 trillion in stock value.
- Employment effects - US employment decreased by almost 300,000 jobs.
- Costs to exporters - Retaliatory tariffs cost US exporters approximately $2.6 billion monthly.
- Burden on consumers - American consumers bore almost the entire cost of tariffs imposed.
Broader implications and policy views
Free trade's net welfare gain assumes winners compensate losers. This compensation often has not materialised, especially for labour. Almost all economists support free trade, but only about one-third of the general public agrees. Most policymakers suggest a return to free trade with compensation policies for vulnerable groups.