December 8th 2023

Protectionism represents a set of Economic policies and measures that governments implement to safeguard their domestic industries and businesses from foreign competition. These policies are primarily aimed at limiting or restricting imports, thereby providing domestic producers with a competitive advantage. Protectionist measures can take various forms, including:

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Tariffs: Taxes imposed on imported goods, making them more expensive for domestic consumers and less competitive with locally produced goods.
Import Quotas: Limiting the quantity of specific goods that can be imported, effectively creating scarcity and increasing prices.
Subsidies: Providing financial assistance to domestic industries, making their products more affordable or competitive in international markets.
Trade Barriers: Imposing non-tariff barriers such as technical regulations, safety standards, and administrative procedures that create obstacles for foreign goods.
Currency Manipulation: Intervening in currency markets to devalue one’s currency, making exports cheaper and imports more expensive.
Buy Local Policies: Government procurement policies that favor domestic suppliers over foreign ones.
Export Restraints: Limiting the export of certain goods to ensure domestic supply.
Dumping Regulations: Imposing regulations to counteract foreign companies selling goods below their production cost in the domestic market.

Historical Evolution of Protectionism

The use of protectionist measures has a long history, dating back centuries. Protectionism often emerges in response to economic, political, or social challenges. Some key historical milestones in the evolution of protectionism include:

Mercantilism (16th-18th Centuries)

During the era of mercantilism, European countries sought to accumulate wealth and power by restricting imports and promoting exports. Governments imposed tariffs and trade monopolies to protect domestic industries and strengthen their economies.

Smoot-Hawley Tariff (1930)

The Smoot-Hawley Tariff Act is a prominent example of protectionism during the Great Depression. It raised tariffs on a wide range of imported goods, triggering retaliation from trading partners and exacerbating global economic woes.

Import Substitution Industrialization (20th Century)

Many developing countries adopted import substitution industrialization (ISI) policies in the mid-20th century. These policies aimed to reduce reliance on foreign goods by promoting domestic industries through protectionist measures.

Contemporary Protectionism

Protectionism has not disappeared in the modern era. Various countries, including the United States and China, have engaged in protectionist policies, sparking trade disputes and tensions in the global economy.

Rationale for Protectionism

Advocates of protectionism put forth several arguments in favor of such policies:

1. Protecting Domestic Industries: Protectionism is often seen as a means to shield domestic industries from foreign competition, helping them survive and grow.

2. Preserving Jobs: By limiting imports and promoting domestic production, protectionism can help retain jobs within a country.

3. National Security: Protectionism can be used to safeguard industries deemed critical for national security, such as defense or energy production.

4. Infant Industries: Protectionist measures can support the development of “infant industries” that are not yet competitive on a global scale.

5. Reducing Trade Deficits: Supporters argue that protectionism can help reduce trade deficits by curbing imports and promoting exports.

Critiques of Protectionism

Critics argue that protectionism can have several adverse effects on economies and international relations:

1. Economic Inefficiency: Protectionism can lead to inefficiencies by shielding uncompetitive industries from competition, resulting in higher prices and lower-quality goods.

2. Reduced Consumer Choice: Restrictions on imports can limit consumer choices and force consumers to pay more for domestic products.

3. Retaliation: Protectionist measures can trigger retaliatory actions from trading partners, leading to trade tensions and potential trade wars.

4. Global Supply Chains: Disrupting global supply chains can harm industries and undermine economic interconnectedness.

5. Resource Misallocation: Protectionism can misallocate resources by diverting them toward less productive industries.

6. Stifling Innovation: A lack of competition can stifle innovation, as domestic firms have less incentive to improve their products.

7. Inequality: Protectionism can exacerbate income inequality by benefiting specific industries or groups at the expense of others.

Contemporary Examples of Protectionism

Protectionist policies and measures are not confined to history; they persist in various forms in contemporary times:

1. Trade Tariffs between the U.S. and China: The trade dispute between the United States and China in recent years included the imposition of tariffs on hundreds of billions of dollars’ worth of goods.

2. Agricultural Subsidies in Europe: The European Union provides substantial subsidies to its agricultural sector, protecting it from global competition.

3. Buy American Policies: The United States has implemented Buy American policies that favor domestic suppliers in government procurement.

4. Brexit and Trade Barriers: The United Kingdom’s decision to leave the European Union led to discussions about trade barriers and customs checks on goods entering Northern Ireland.

5. COVID-19 Export Restrictions: During the COVID-19 pandemic, some countries imposed export restrictions on medical supplies and pharmaceuticals.

Trade Blocs and Protectionism

Trade blocs, such as customs unions and free trade areas, represent a nuanced aspect of protectionism. While they promote trade and economic cooperation among member countries, they can also create barriers to trade with non-member countries. The European Union, for example, has a single market that allows for the free movement of goods, services, and labor within the EU, but it enforces a common external tariff against non-EU countries.

The Future of Protectionism

The future of protectionism remains uncertain, as it is influenced by a complex interplay of economic, political, and social factors. The COVID-19 pandemic, trade tensions between major economies, and shifts in global supply chains have all influenced protectionist sentiments. The outcome of ongoing trade negotiations and the stance of governments toward international trade will continue to shape the landscape of protectionism in the coming years.

Conclusion

Protectionism is a multifaceted economic and political strategy that has played a significant role in shaping economic policies and international relations throughout history. While proponents argue that protectionism can safeguard domestic industries and jobs, critics contend that it can lead to economic inefficiencies, reduced consumer choices, and global trade tensions. The ongoing debates surrounding protectionism underscore the complex and dynamic nature of international trade and the need for careful consideration of its consequences on a global scale.

Connected Economic Concepts

Market Economy

The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation.

Asymmetric Information

Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categorie

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