What is protectionism? A short summary

16, Jul - BLOG

The emergence of economic protectionism is the result of the fact that open trade, while supported by economic theory, is also regularly criticized. Among other things, it is believed that the globalization of economic relations is responsible for the destruction of jobs and falling wages. This is why protectionist measures - a patronizing system of customs policy with high duties on imported goods - are sometimes introduced. Let's look at how protectionism works and what results it has produced in the past.

Benefits of free trade

Classical theories of international trade show that each country has an interest in specializing in those goods in which it is most productive. In this way it not only sells its manufactured products more efficiently, but also successfully imports products abroad - through such specialization each country can increase its productivity and the quantity of goods produced.

In this respect, international trade can be compared to a situation where each person specializes in producing one type of good or service. Example: a baker produces only bread and a builder produces only houses. All goods and services that they do not produce, they respectively receive from other specialists. But both the baker and the bricklayer become more productive because of their specialization, which allows them to improve their skills in a particular area. This increase in productivity allows for increased production and consumption.

Advantages of specialization

The advantages of specialization and trade were formulated at the beginning of the 19th century by British economists A. Smith (theory of absolute advantage) and D. Ricardo (theory of comparative advantage). According to the latter theory, each country should produce goods that cost it relatively cheaper, and import those that are more profitable to buy abroad. Despite the simplistic nature of Ricardo's model, the theory of comparative advantage is still the cornerstone of international trade thinking.

Criticism of globalization

However, applying the principles of Ricardo's theory to free trade can have negative consequences. For example, specialization of a country implies the disappearance of certain activities. People who lose their jobs may find it difficult to retrain to find employment in the activities in which the country specialized. Moreover, globalization, with its increasing competition with developing countries, is seen as the cause of massive displacement and layoffs in sectors with the largest number of low-skilled workers. Protectionism is most often a response to the effects of globalization and is a refusal to allow goods produced at low prices in other countries to invade the local economy. Often the countries producing such goods are not subject to the same social and environmental regulations as richer importers (e.g. in the case of importing cheap goods from Asia to Europe).

Different types of protectionist measures

Protecting a country's economy from international competition can take many forms. The most common are:

• The imposition of customs duties, i.e. taxes on imports;
• Tightening of health and consumer protection measures. In some cases, health regulations may be used to disadvantage foreign products under the guise of consumer protection;
• Favoring domestic producers, e.g., in tenders;
• Subsidizing domestic producers.

Harmful effects of protectionism

Many economists doubt the effectiveness of protectionism. Take, for example, the tariffs imposed by Donald Trump on imports from China and Europe in order to protect jobs in the US. Such a measure could create new jobs in sectors that are now protected from competition. However, secondary effects should also be considered. The main secondary effect is the retaliation of other countries, which could lead to a decrease in U.S. exports. But even if Chinese and European tariffs are not raised, US exports will still decline. All other things being equal, if the EU imports less, the dollars will rise (if the EU imports less, it buys less of other countries' currency, which makes the dollars more expensive). A stronger dollars will automatically make U.S. exports more expensive.

As a result, U.S. exports will fall by about the same amount as imports, negating the expected positive effect on employment. Production would no longer take place in the most efficient country, leading to a decline in the productivity of the U.S. economy. The negative effects of tariffs would outweigh the positive ones. There is debate about whether we should respond to another country's protectionist measures with similar measures. The nineteenth-century economist Frederic Bastiat argued against this with the famous phrase, "If foreigners have rocky shores, it does not mean that we must lay stones in our ports."

The difficulty of introducing effective protectionist measures

Among other theories of protectionism, Friedrich List's "learning protectionism" deserves special attention, the essence of which is to support and protect national enterprises in the first stages of development with their subsequent integration into international competition. This concept is attractive, but requires the state to know exactly which industries to protect. One of the main risks is that trade protection is granted to those industries that are best represented politically - not necessarily those that are economically feasible to protect.

Sometimes protectionism protects the rents of companies that benefit from effective lobbying under the guise of protecting local employment. In such cases, protectionist measures are clearly harmful to the economy of the country that implements them. Finally, transnational companies easily circumvent national borders and protectionism. They settle in countries with protectionist policies in order to obtain tax and social benefits. In this way, they threaten national companies and production directly on their territory.

Thus, with the further development of the free market and deep globalization of economic processes, protectionist measures do not always seem to be the right solution. Today, national economies are so strongly interconnected that an attempt to protect them from imports of cheap goods may not only fail to achieve the primary goal of protecting jobs, but also have the opposite effect.