Protection on trade occurs when countries impose restrictions on imports into the economy. It can be defined as nation or a group of nations working in conjunction as a trade bloc, creating trade barriers with the specific goal of protecting its economy from the possible perils of international trading. In simple words, protectionism is a government action and policies which restricts or restrain international trade often intended to protect local businesses and jobs from foreign competition i.e. a policy that limits unfair competition from foreign industries. The objective of protectionism is to provide employment to people by protecting nation’s vital economic interests such as key industries and commodities. According to critics, protectionism often hurts by slowing economic growth and pushing up prices. However, the supporters argue that protectionist policies provide competitive advantages and create jobs. The protection can be in the form of higher tariffs or quotas, embargoes or in other forms such as domestic subsidies to give industries unfair advantage.
Reasons for Trade Protection
- Protect Infant Industries
- Protect Sunset Industries
- Protect Strategic Industries
- Protect non-renewable resources
- Help the environment
Trade protection can be used to protect sunrise industries, also known as infant industries such as those involving new technologies. The protection gives the firms the chance to grow, develop and become globally competitive i.e. it allows the companies to develop a comparative advantage. The protection from competition helps the domestic firms to expand and benefit from economies of scale. Also, this helps the firms to invest in real and human capital and develop new capabilities and skills. Once the firms developed the required capabilities and skills, there is less requirement of trade protection and the barriers may be eventually removed.
Sunset industries are also called as declining industries. These industries need support to enable them to decline slowly and avoid some of the negative effects of such decline. For e.g. In U.K. where each generation throws up its own declining industry, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.
The barriers can also be imposed to protect strategic industries such as food, energy, water, steel, armaments and food. For e.g. European Union’s common Agricultural Policy aims to provide food security to Europe by protecting its agricultural sector.
The protection of non-renewable resources can be done by limiting output in the short term through production quotas. The protection of non renewable resources, including oil, is important for countries aiming to rely on oil exports lasting into the long term, such as the oil-rich Middle Eastern economies.
Emission of CO2 caused by increased production and transportation pose dangers to the environment. Therefore, there are countries that prevent themselves from trading in order to protect and limit damage to their environment.
Methods of Trade Protectionism
- Requirement of Local Contents
- Administrative Trade Policies
- Antidumping Policies
- Exchange Rate Controls
Tariffs are a kind of tax on imports from other countries and it could be specific in which there is a fixed rate or fee for each unit of a product or commodity brought into a nation. The government imposes tariffs in order to protect its own industries and companies and tries to put a restriction on the imports of foreign goods and services.
Quota is a kind of direct restriction on the number of certain goods, products and commodities that may be permitted to be imported into a nation. The government issues licenses to certain group of person or companies in order to enforce quota.
Subsidies are government payments to domestic producers and are aimed to provide the producer an extra-cash so that they can produce goods at low manufacturing costs and access foreign markets. The subsidies can be in the form of cash payments, low-to-no-interest loans, tax breaks and government ownership of common stock in domestic companies.
These may be imposed by governments seeking to establish a manufacturing requirement in which the part of the product must be made domestically. Local content requirements are intended to decrease imports and occur, generally, when the major part of the product manufactured is made locally.
These consist of bureaucratic rules, laws and regulations with administrative requirements, and paperwork to be completed. These barriers can be either formal or informal. Formal barrier come in the form of onerous rules, regulations and are designed to create serious difficulties for an importer of goods or commodities into a particular nation. On the other hand, informal barriers include the inspection of every product, good and commodity entering a nation.
Antidumping policies include regulations prohibiting the sale of goods, products, or commodities below fair market value and are used to prevent the selling of goods in a foreign market at a price far below the production cost in order to gain a substantial share of that nation’s market.
Exchange rate controls can be used to increase the opportunity of the producer, whether in developed or developing countries, to sell its product and goods in foreign markets. This can be done by selling one’s product cheaper abroad and lowering the value of its currency in the foreign exchange markets.
Effect of Trade Protectionism
Trade Protectionism are regarded as government intervention since it is a government that directly control over its borders and the flow of goods, products and commodities in and out of a country. There are numerous reasons why a nation would adopt a trade protectionist policy as it has certain long and short-term effects on a nation’s macro-economy and often the global economy. These effects include:-
- Consumers Limited choice
- Hinders growth of Infant Industry
- Exchange Rate Controls
Due to the quotas, the consumers have a limited choice of products and goods. Also, trade protectionism is intended to safeguard industries, companies and jobs actually mean to limit the choice of consumers in terms of quality, quantity and type of product.
Trade Protectionism hinders the growing pains and maturation process that are vital for an infant industry and also cost government significant amount of money and financial resources in order to protect its infant industry. This promotes inefficiencies by the infant industry and they do not have any incentives to make efficient, intelligent, long-term investments by borrowing funds or issuing common stock from the domestic international capital markets.
Exchange rate controls causes long-term inflation so the domestic nation keeps the value of its currency low in order to sell its goods and products at cheaper prices in foreign markets. This will lead to increase in the prices of any foreign products and the consumers will be forced to pay higher prices for goods, products and commodities they need to survive.