Protectionism has become a widely discussed issue in the global economy, with many countries engaging in various forms of protectionist policies to maintain their competitive edge and protect their own markets. With globalization increasing at an accelerated rate since the 1990s, it is important to examine how governments can use trade policy to safeguard domestic production and industry while also allowing companies and countries access to international markets. In this blog post, we will discuss what protectionism is and its related implications for businesses and economies around the world.
Understanding Protectionism
International imports are usually the critical target of protectionist policies. Goods coming into the country face heavy scrutiny for numerous reasons. One of the main reasons is that it is difficult to control the product standards in other nations. Governments frequently resort to protectionist policies, with subsidies playing a major role in stimulating the economy. Subsidizing large corporations gives them an advantage in the global marketplace, allowing them to enjoy greater economies of scale and compete on an unbalanced playing field.
Those who challenge the benefits of protectionism often argue that there is little benefit to the individual consumer. Looking at the statistics, over the long term, protectionism slows economic growth, which can put the economy into a recession. Recessions are often the most painful for the citizens who will experience higher prices due to inflation. These consumers argue that greater competition through international free trade would serve as a better alternative. The scholars who defend protectionism often say that the policies help reduce domestic unemployment through the improved gross domestic product (GDP). They argue that strengthening the domestic economy will make the country’s industries more globally competitive.
Protectionist Tools
Tariffs
Protectionist policies are often enacted through highly restrictive taxes, which raise the price of imports for a country. To discourage consumers and suppliers from importing a significant amount of goods and services, many governments implement tariffs to restrict this movement. Import tariffs are standard in almost every country worldwide as they help the government generate money on international transactions.
Scientific tariffs
These import tariffs are decided on an ad-hoc basis. Government appraisers are employed and trained by the customs department to evaluate the number of taxes to be imposed on imported products. This evaluation is done on an item-by-item basis. These tariffs aim to increase the cost of goods for the importer. This additional cost makes it difficult to keep their prices low, forcing them to pass on higher prices to the consumer. Consumers will then only be able to afford fewer of these products, eventually slowing down the economy as this spills over to different sectors.
Peril point import tariffs
Lawmakers may decide that there is a need to protect industries from international trade due to quality and safety concerns. Protectionist government policies can also target entire industries with tariffs. These tariffs are targeted at a specific industry and are calculated based on the estimated harm to local industry. Tariff decreases or increases in this regard are based on the jeopardy of industry closure due to an inability to compete with international rivals.
Retaliatory tariffs
A government may impose retaliatory tariffs if they feel their industries are unfairly treated. Imposing excessive tariffs on your trading partners may lead to similar policies being drafted against your domestic industries by their lawmakers.
Import Quotas
Protectionists designed import quotas to ensure that only a certain amount of one product can be imported during a set period. These nontariff barriers limit the supply of specified products. It renders exporters unable to flood domestic markets with their products. This policy means that the mass-producing capacity of foreign markets will not affect the supply/demand balance in the domestic markets. Its effect on pricing in the economy is only marginal. These policies are standard in various countries and are not considered drastic.
Protectionists argue that the advantage of this policy is that it prevents dumping. Product dumping is often caused by mass producers flooding the market and dumping their products in a country. Many conglomerates can afford this because their prices are lower than many domestic production costs. In extreme situations, the government may issue an embargo against the importation of designated products. This policy is binding and means products from that country are entirely prohibited.
Product Standards
Countries that have set high product safety and product quality laws will often implement protectionist policies to ensure that imported products are up to their standards. These laws help prevent fires in the home and accidents on the road. Some countries wish to prevent cheap and non-ecofriendly materials from being sold to their citizens. This protectionism can limit imports based on a country’s internal controls; however, governments often need to limit what they cannot supply themselves.
Product standard tariffs and embargos are often much lower for food preparation and intellectual property enforcement sectors. These grey areas can vary based on country and culture. Protectionist laws are more relaxed to prevent common product blockage of certain imports.
Government Subsidies
Government subsidies are a complex form of financial assistance the government offers in various forms. The different types of subsidies are direct or indirect. The government may agree to directly inject cash into a business or offer them unique savings opportunities such as 0% interest or heavy tax breaks.
The government may decide to offer these subsidies if they recognize the potential of these businesses to improve the economy in areas of production, employment, tax or property,
A country with a significant trade deficit may offer export subsidies to various industries. This incentive aims to help boost a country’s balance of trade. These export subsidies help businesses access international markets and increase export earnings.
