Protectionist Policies: An Introduction (AQA A Level Economics)

• Free trade aims to maximise global output based on the principle of comparative advantage
• However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
• This is called protectionism and may take the form of limiting imports, limiting exports, boosting exports, or putting administrative barriers in place

Reasons Countries Adopt Protectionist Policies

Reason	Explanation
Protect infant firms	To protect new firms that would be unlikely to succeed at start-ups due to the level of global competition. Once established support is removed
Sunset industry	Similar to above, but at the other end of the life cycle, these firms are on their way out, and the government chooses to support them to help limit the economic damage that would occur if they closed abruptly There is a welfare loss as inefficient industries are producing at the expense of more efficient global producers
Employment	When firms outsource production to other countries Or certain industries are experiencing structural unemployment governments will step in to protect jobs
Current account deficit	When imports > exports, the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms Protectionism aims to correct this imbalance
Labour/environmental regulations	Many countries offer cheap labour and low-cost production due to poor environmental regulations Protectionism can help apply pressure to bring about change in these countries

Consequences of Protectionism

• The consequences of trade protection are evident from the impact that each form of protection has on the stakeholders
  • These can be summarised in the diagram below

Diagram: Consequence of Protectionism 

Arguments against the use of protectionism measures

1. Reduced choice: Protectionism reduces both the quantity and variety of goods/services available to customers
2. Increased prices: Protectionism either reduces the supply of goods and services, which leads to higher prices, or in the case of tariffs, directly leads to higher prices
3. Increased costs: Manufacturers who rely on imported raw materials face higher production costs. If protectionism is widespread, it may generate inflation in the economy and/or lead to a loss of employment
4. Retaliation: Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures, which further harm free trade
5. Reduction in export competitiveness: Protectionism reduces the need to be efficient or to innovate. Over time, this leads to higher prices and worse quality products which will reduce export sales
6. Resource misallocation: Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producers
7. Domestic inefficiency increases: With a reduced level of competition, domestic firms will be less productively efficient and will spend less on research, development and innovation