In 1886, American free-trade advocate Henry George famously identified the problem of protectionism through an amusing analogy: "What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war." George poignantly identified the nature of tariffs and import quotas, a forcible restriction of trade and imposed self-sufficiency, just like an embargo or blockade. Domestic consumers are forced to pay higher prices and domestic factors of production are committed into less-efficient processes.

Unintended Consequences of Protectionism

Even though protected industries may receive a short-term benefit from trade protectionism, the long-run effect is to suppress innovation and encourage political rent-seeking. Businesses are constantly looking for the easiest way to produce and protect profits, and a great many of them have joined with government policies to exclude unwanted competition.

Protectionism creates a wealth transfer from disbursed consumers, who are forced to pay higher prices, into the hands of protected business owners, employees and shareholders. A great deal of wealth is needlessly devoted towards comparatively inefficient production processes.

There are very few macroeconomic policy proposals about which virtually all economists agree, but a support of free trade is among them. On net, economists agree that protectionism hurts the domestic citizenry more than it helps any specific industry.

The Smoot-Hawley Tariff

In 1930, the United States raised tariffs on more than 20,000 imported goods through the Smoot-Hawley Tariff Act. The Act, which represented the highest tariff level in more than 100 years, was uniquely destructive to the U.S. economy. The reason it was so destructive, besides the other economic problems with tariffs, was that nearly all of America's major trade partners reciprocated by erecting their own tariffs on U.S. imports. U.S. imports dropped 66% until the Act was repealed. Exports decreased 61%. International trade virtually collapsed, making the Great Depression even worse.

  1. How do tariffs protect domestic industries?

    Understand how tariffs are used by domestic government to protect its domestic industries, how they are levied, and whether ... Read Answer >>
  2. What are common reasons for governments to implement tariffs?

    Gain a basic understanding of a government-sanctioned import tariff, what it is meant to accomplish and common reasons for ... Read Answer >>
  3. What is comparative advantage?

    Comparative advantage is an economic law that is foundation for free-trade arguments. Read Answer >>
  4. The risks businesses face in international finance

    When an organization engages in international financing activities, it takes on additional risk, including foreign exchange ... Read Answer >>
  5. What are some examples of free market economies?

    In a free market economy, the law of supply and demand, rather than a central government, regulates production and labor. ... Read Answer >>
  6. Can companies insure their accounts receivable?

    Understand what credit insurance is and how it protects companies against payment problems they may encounter in trying to ... Read Answer >>
Related Articles
  1. Investing

    E*TRADE: With Tariffs Official, Best to Take a Wait-and-See Approach

    With tariff proposals now signed by President Donald Trump, investors are best served taking a wait-and-see approach, advised E*TRADE.
  2. Investing

    3 Ways China Could Hurt American Businesses

    Limited by a trade surplus with the U.S., Beijing could take other measures to fight back.
  3. Insights

    Trump's Steel and Aluminum Tariffs: What You Need to Know

    A look at key issues regarding the latest import tariffs on steel and aluminium announced by President Trump
  4. Investing

    Why Techs, Banks May Outperform In a Trade War

    Credit Suisse indicates which stocks are likely to suffer in a trade war, and which may ride it out.
  5. Investing

    U.S. Stocks Could Be Hurt By Chinese Soy Tariffs

    Believe it or not, the U.S. exports soy. And China is its biggest customer.
  6. Investing

    Charles Schwab: Trade Issues to Create Bouts of Market Volatility

    Charles Schwab said that the tariffs proposed by President Trump will create bouts of volatility.
  7. Investing

    E*TRADE: March Off to a Down Start for Stocks

    The first week of trading came in like a lion in March thanks in large part to tariff proposals, an analysis by E*TRADE shows.
  8. Insights

    Peter Thiel Used Neoclassical Theory to Argue for Trump’s Tariffs

    Peter Thiel says that capital flowing from poor countries to rich countries is proof that something is "strange" about global trade dynamics.
  9. Investing

    Manitowoc Could Be Biggest Tariffs Loser: JPM

    When it comes to proposed steel and aluminium tariffs, Manitowoc could end up the biggest loser.
  1. Trade War

    A trade war is a side effect of protectionism that occurs when ...
  2. Tariff

    A tariff is a tax imposed on imported goods and services.
  3. Multiple Column Tariff

    A tariff system where the tariff rate or import tax assessed ...
  4. Quota

    A quota is a government-imposed trade restriction limiting the ...
  5. Customs Barrier

    Any measure designed to limit international trade. A customs ...
  6. Import Duty

    Import duty is tax collected on imports and some exports by a ...
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center