Why do countries use protectionism

It can also be argued that a developing nation in attempting to diversify its economy, must protect its infant industries. Government intervention of an infant industry may come in the form of tariffs, subsidies, administrative trade policies, or quotas.

These effects include:. A key effect of trade protectionism is that consumers will have a limited choice of products and goods since there may be quotas on how much may be imported. Due to these quotas, consumers will have a very limited choice as to the quantity, quality, and type of product that would otherwise be available to them without trade protectionism.

Protectionist policies that intended to safeguard industries, companies, and jobs actually mean that consumers are limited in the availability of products and goods and may have to settle for poor quality instead. Another problem that consumers will face is that they will have to pay more for the limited quantity of goods and products, thus causing inflation to possibly greatly increase. If consumers have a limited choice, must settle for lower quality, and pay more for a particular product, then they may either pay that amount, purchase less of that product, or not make a purchase at all.

Domestic firms may also be hurt financially since they may have to purchase parts to make their products and then pass the increased cost on to the consumer. Overall, global competition is a key factor in keeping the price of numerous goods and products down and give consumers the ability to spend.

Infant industries may never grow up due to government trade protection policies. The key questions are: When will an infant industry no longer need protection from its home government?

When will it be regarded as a mature company that has a comparative advantage against foreign companies and in overseas markets?

A nation can use the policy of protecting its infant industry, but for how long is a key concern. The protection of an infant industry may actually end up costing a government significant amount of money and financial resources in order to protect its infant industry.

This may actually promote inefficiencies by the infant industry and have no incentive to make efficient, intelligent, long-term investments by borrowing funds or issuing common stock from the domestic international capital markets. This type of protectionism may hinder the growing pains and maturation process that are vital for an infant industry to experience in the short and long-term if it is to be successful and competitive in global markets and eventually have a comparative advantage.

Exchange rate controls that causes long-term inflation since the domestic nation has kept the value of its currency low. By having its currency decrease in value so that it can sell its products and goods at cheaper prices in foreign markets, any foreign products sold in its market will actually see prices increase.

Consumers will be forced to pay higher prices for goods, products, and commodities they need to survive. The problem is that a nation may have a good intention of helping its industries be competitive abroad while its citizens pay higher prices at home. A trade war among nations.

A serious problem with trade protectionism is that nations will take reciprocal action if there are trade protection policies put into effect. The problem here is that nations will retaliate if they cannot sell their goods and products in markets where they normally could.

For example, the United States and Japan, long-time allies, both politically and militarily since the end of World War II, have invoked tariffs and administrative trade policies against each other. Hawkins , Robert G. Henner , H. Lafay , and B. Holzman , Franklyn D. II , No. Hudec , Robert E. Jackson , John H. Jondrow , James M. Kelly , William B. MacPhee , Craig R. Magee , Stephen P. Washington , Melvin , James R.

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Congo, Republic of. Import 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 provided by an exporter to an importer. This is typically a less drastic action that has a marginal effect on prices and leads to higher demand for domestic businesses to cover the shortfall.

Quotas may also be 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 completely prohibited, is the most severe type of quota. Product safety and high volumes of low-quality products or materials are typically top concerns when enacting product standards. Some countries may have lower regulatory standards in the areas of food preparation, intellectual property enforcement, or materials production.

This can lead to a product standard requirement or a blockage of certain imports due to regulatory enforcement. Overall, restricting imports through the implementation of product standards can often lead to a higher volume of product production domestically. For one example, consider French cheeses made with raw instead of pasteurized milk, which must be aged at least 60 days prior to being imported to the U. Because the process for producing many French kinds of cheese often involves aging of 50 days or fewer, some of the most popular French cheeses are banned from the U.

Government subsidies can come in various forms. Generally, they may be direct or indirect. Direct subsidies provide businesses with cash payments. Indirect subsidies come in the form of special savings such as interest-free loans and tax breaks. When exploring subsidies, government officials may choose to provide direct or indirect subsidies in the areas of production, employment, tax, property, and more.

Export subsidies provide an incentive for domestic businesses to expand globally by increasing their exports internationally. Tax Laws. Your Privacy Rights.

To change or withdraw your consent choices for Investopedia. At the same time, there are thousands of other products than do not meet certain standards. Whether those standards are reasonable or not is another question.

Nevertheless, they subsequently reduce the choice to the average consumer. Protectionist policies impose an additional cost and loss on all parties. First of all, domestic consumers must pay a higher price for goods. At the same time, importers face a decline in demand, so international jobs are lost.

For instance, the US-China trade war meant that US consumers paid a higher price whilst demand for Chinese workers is reduced. So the Chinese unemployment increases and US consumers pay more.

However, the counter-argument is that it saves US jobs and businesses. Now there is some validity to that claim. However, the reality of the situation is that when a US consumer buys cheaper Chinese goods, that money goes to a Chinese exporter. What we see as a result is that Chinese demand drives employment in other industries. So jobs that may have been lost in one industry, are being created in another.

At the same time, the FDI inflows also create employment in the relevant industry. Although there is disruption, there is a net positive gain in the long term. Employees will have to shift to new industries, but the average consumer benefits from lower prices.

By contrast, the only winner under protectionism is specific domestic workers. However, they too are consumers and consequently lose out too. In the long-run, protectionism is not good for the economy. It makes consumers and businesses pay more.

And whilst it may protect jobs in the short-term, the economy as a whole would be better served in allowing cheaper imports in.

Although this may temporarily destroy some jobs, consumers benefit from lower prices. In turn, the income that would have been spent on the goods before can now be spent in other markets. In turn, employment is stimulated elsewhere in the economy. Deadweight Loss Definition Read More ». Nash Equilibrium Definition Read More ». Excise Tax Definition Read More ». Protectionism Definition 6 Types, Advantages and Disadvantages. Key Points Protectionism is where a nation places strict regulations on imports coming into the country.

A nation may adopt protectionist measures in order to protect domestic jobs, industry, national security, and to protect the consumer.

There are many types of protectionism such as subsidies, restrictions on FDI, exchange rate controls, regulations, tariffs, and import quotas. Types of Protectionism When a nation takes a protectionist approach, it can use a number of tools.

Tariffs Tariffs are one of the oldest tools that protectionist nations use. Advantages of Protectionism Protectionism is defined as the restriction of international trade in order to benefit the domestic industry. Let us look at some of the arguments made for protectionism below:.

What are the reasons for protectionism? What are the methods of protectionism?