Protectionism - Explained
What is Protectionism?
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Table of ContentsWhat is Protectionism?How Does Protectionism Work? Academic Research on Protectionism
What is Protectionism?
Governmental restrictions and policies placed on international trade to protect the interests of local businesses, jobs, and reduce competition is called Protectionism.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How Does Protectionism Work?
There are four different methods of enforcing Protectionism:
Tariffs: Import duties or tariffs are levied at three different levels by the government whos also responsible for collecting these monies.
- Scientific Tariffs - Price of imported goods costs the end user more than locally produced goods.
- Peril Point Tariffs - When local industry verticals are failing to keep up with international competitors, these tariffs are imposed to make it costlier for international firms to trade in local markets.
- Retaliatory Tariffs - Imposed to balance out excessive import duties being levied by other trading countries.
Import Quotas: These are quotas imposed on the number of goods that can be imported within a financial period. This results in demand exceeding supplies for such products, allowing local traders to meet the deficit. Import Quotas can also be implemented to prevent the practice of dumping. An Embargo is the most severe of Import Quotas with a complete ban on the import of certain goods.
Product Standards: These rules are put into place to avoid importing substandard goods and materials. They can also be manipulated to muscle out or embargo certain products that are giving stiff competition to local businesses. For e.g. the quality standards required to import a regular wheel of cheese might border on the ridiculous, making it hard for international manufactures to meet such stringent requirements, reducing overall imports of the product, facilitating local businesses to address the unmet demand.
Government Subsidies: Providing subsidised resources to local businesses, like discounted land rates, reduced service charges, etc., also facilitates the local business in diverting their resources towards beating the competition. The heavily subsidised, local automotive industry in China is an example of such governmental Protectionism in the form of subsidies, accorded to local industries.Merits and Demerits of ProtectionismCritics of Protectionism argue that its bad for economic growth, leads to rise in prices over the long term, stifles free trade, and ends up costing more to the people its intended to protect. Those in favour of Protectionism believe that its better for local jobs and economies, and provides them with a competitive advantage over international firms.