Protectionism

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What is 'Protectionism'

Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.

BREAKING DOWN 'Protectionism'

The merits of protectionism are the subject of fierce debate. Critics argue that over the long term, protectionism often hurts the people it is intended to protect by slowing economic growth and pushing up prices, making free trade a better alternative. Proponents of protectionism argue that the policies provide competitive advantages and create jobs. Protectionist policies can be implemented in four main ways: tariffs, import quotas, product standards and government subsidies.

Tariffs

There are three types of tariffs, also referred to as import duties, that can be implemented for protective measures. All forms of tariff are charged and collected by 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 an inability to compete on pricing. Retaliatory tariffs can be used as a response to excessive tariffs being charged by trading partners.

Import Quotas

Trade quotas are non-tariff barriers that are put in place to limit the number of products that can be imported over a set period of time. 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 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.

Product Standards

Limitations based on product standards are implemented for a variety of reasons, including concerns over product safety, sub-standard materials or labeling. 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 U.S. Because the process for producing young cheeses is often 50 days or fewer, some of the most popular French cheeses are banned, providing local producers the opportunity to compete with pasteurized versions.

Government Subsidies

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.