What is 'Protectionism'
Protectionism refers to government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are tariffs and quotas on imports and subsidies or tax cuts granted to local businesses. The primary objective of protectionism is to make local businesses or industries more competitive by increasing the price or restricting the quantity of imports entering the country.
BREAKING DOWN 'Protectionism'
There is significant debate surrounding the merits of protectionism. Critics argue that over the long term, protectionism often ends up hurting the people it is intended to protect while promoting free trade as a superior alternative to protectionism. Proponents of protectionism argue that the policies provide competitive advantages and create jobs. Protectionist policies can be implemented in four ways.
Taxation With Tariffs
There are three types of tariffs, also referred to as import duties, that can be implemented for protective measures. All forms of tariffs are charged and collected by federal governments to raise the price of imports to equal or exceed local prices. Scientific tariffs are imposed to raise the prices of products to end users. Peril point tariffs are implemented when less-efficient industries are in jeopardy of closure due to the inability to compete on pricing. Retaliatory tariffs can be used as a response to excessive tariffs being charged by trading partners.
Trade quotas are non-tariff barriers (NTBs) put in place to limit the number of products that can be imported over a set time span. The purpose of quotas is to limit the supply of specified products, which typically raises prices and allows local businesses to capitalize on unmet demand. Quotas are also put in place to prevent product dumping, which occurs when foreign producers export products at prices lower than production costs. An embargo, in which the importation of designated products is forbidden, is the most severe type of quota.
Limitations based on product standards are implemented for a variety of reasons, including concerns over product safety, goods manufactured with sub-standard materials or labeling issues. Whether these concerns are valid or exaggerated, limiting imports benefits local producers. For example, French cheeses made with raw, instead of pasteurized, milk must be aged at least 60 days prior to being imported to the United States. Because the process for producing young cheeses is often 50 days or less, some of the most popular French cheeses are banned, providing local producers the opportunity to compete with pasteurized versions.
Governments can help domestic businesses compete by providing subsidies, which lower the cost of production and enable the generation of profits at lower price levels. Examples include U.S agricultural subsidies and subsidies paid by the Chinese government to help grow the country’s automotive industry.