Protectionism: Effects, Strategies, and Implications in International Trade

In this document we will discuss about Protectionism and below are the summary points of this document:- Protectionism aims to shield local businesses from foreign competition and boost domestic production. It can benefit a nation's economy in the short term but harm it in the long run. Methods of protectionism include tariffs, quotas, subsidies, and preferential government spending.

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Introduction
Today’s world of business has become more globalized (Rodrik, 2014). Many nations
have realized the merits of international trade and have encouraged and supported many of the
domestic businesses to venture into it. International trade is quite competitive and hence only
businesses which adopt sound economic policies survive the competition. Due to stiff
competition, weak players in international trade may end up exiting the trade as they may lack
means of survival from strong competitors. As a result, nations with weak international trade
players may end up protecting them to prevent them from collapsing since they may be the key
industries in their nations. Protectionism enables governments of various nations to protect their
local producers’ hence boosting domestic production in the nation. Protectionism is a two-edged
sword. Protectionism can be of benefit to a nation in the short term period but in the long run
period, it may seriously harm its economy. Therefore, if possible, various nations in international
trade should adopt free trade whereby various players in international trade are left to devise
their own means of survival without government intervention (Casella, 2015). Adoption of free
trade policies in international trade will help improve quality of traded goods and services to
local consumers and also reduce their price. This is due to the fact that various players in
international trade only sell goods and services for which they have a comparative advantage in
producing compared to their competitors. In this research, protectionism has been discussed from
two perspectives in that it can benefit a nation’s economy and can also harm it the long run
period. Therefore, it is recommended that various nations in international trade should undertake
protectionism only when necessary and in circumstances when it cannot be avoided
(Eichengreen, 2016).
Discussion
Protectionism refers to actions of various nations’ government of adopting trade policies
which control the trading activities of international businesses and their local businesses. The
main aim of protectionism is to shield local businesses from stiff competition by foreign
businesses hence boosting domestic production. Protectionism majorly restricts imports from
various international businesses and hence encourages the consumption of goods and services
which are produced by local producers.

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Methods of protectionism
There are various methods which can be used by various nations to protect their local
businesses. They include quotas, devaluation, tariffs, standardization, subsidization, voluntary
export restraints and preferential government spending. These have been discussed as follows:
i. Tariffs
There are two types of tariffs namely the import tariffs and the export tariffs. However,
for the purpose of protectionism, import tariffs are used as they are perceived to be helping the
local producers while export tariffs are not used as they are perceived to be hurting the local
producers. Import tariffs are generally referred to as duties or taxes which are imposed on the
imports. Import tariffs generally increase the price of imported goods more than that of the
locally produced goods in the local market hence reducing their demand (Jones, 2017). On the
other hand, the equivalent locally produced goods and services demand increases as they are
cheaper than the imported ones. Due to the increased demand for locally produced goods and
services, the local producers produce more in order to satisfy the rising demand. As a result, the
local producers end up growing by producing more and making more profit from increased sales
resulting from the increased demand for the locally produced goods and services. The following
diagram illustrates the impact of tariffs on imports:
From the diagram above, it can be seen that when tariffs are imposed, the price for the
imported goods and services increases from P1 to P2. As a result, the volume of imports decreases

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from Q1Q4 to Q2Q3 due to decreased demand for imported goods. On the other hand, domestic
supply increases from Q1 to Q2 due to the increase in demand for locally produced goods and
services.
Case examples
The United States of America President, Donald Trump has imposed 25 percent tariffs on
steel and 10 percent tariffs on aluminum from the key importing nations of these materials to the
United States America (Bergsten, 2017). These include the European Union, Canada, Mexico
and China. Trump did this hoping to minimize trade deficit between the United States and these
nations especially China and also save the United States steel and aluminum manufacturers from
stiff competition from these nations. This move was countered by various nations including
China, Canada and the European Union among others by also imposing equivalent tariffs on the
United States imports in their nations and hence Trump may not achieve his intended goal of
imposing his tariffs.
ii. Quotas
Quotas refer to restrictions set by a given nation’s government on the number of imports
to be allowed into the nation or the number of exports to be allowed out of the nation. Quotas are
classified into two namely the import and export quotas. For the purpose of protectionism,
import quotas are used by a given nation’s government. Import quotas restrict the number of
imports entering a given nation. This reduces the number of imported goods in a given nation.
Due to the reduced amount of imported goods, the prices for the imported goods in the nation
increases as compared to that of the equivalent locally produced goods. As a result, their demand
decreases. On the other hand, the demand for locally produced goods and services increases.
This enables local producers to produce more goods and services to meet the increased demand.
As a result, they sell much and make more profit which enables them to expand their operations
(Fidler, 2017).
Case examples
The United States has set quotas for nations importing beef into it (De Melo, Tarr &
Mundial, 2017). Some of the nations which have set quotas for beef importation to the United

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States include Argentina, Australia, Japan New Zealand and Uruguay which have the set quotas
(in tones) of 20000, 418214, 200, 213402 and 20000 respectively. The other nations’ quotas
include 64805 tones. Canada and Mexico are allowed to import unlimited amounts of beef to the
United States.
iii. Subsidization
A subsidy generally referred to as a government incentive is a financial support extended
by the government to certain sectors of the economy or various businesses within the economy in
order to boost the productivity of these sectors (Faulhaber, 2015). Subsidies can be either direct
or indirect. Direct subsidies are in the form of interest-free loans and cash grants among others
while indirect subsidies are in the form of low-interest loans, tax breaks and insurance among
others. For the case of protectionism, the government can directly support local firms through
lump-sum direct cash or even cheaper loans in order to adjust and compete favorably against the
imports. The government may also offer export subsidies in order to boost exports from the local
exporters. Subsidization enables local producers to sell their locally produced goods and services
at relatively lower prices compared to equivalently imported goods and services. It also enables
the local exporters to sell their exports cheaply in the international market hence winning a large
market share. This, therefore, enables local producers to expand their operations in order to cater
to the increasing demand for their goods and services (De Wit, 2014).
Case examples
From the year 2007, the Chinese government heavily subsidized steel and paper
production in its nation. During the year 2000, China was importing 13 percent steel worldwide.
The Chinese government heavily subsidized the steel manufacturing industries by more than $27
billion and this made China rise and place itself among the largest steel producers in the world.
Even though Chinese steel production is not aided by technological advancements or economies
of scale, China sells its steel by 25 percent less amount as compared to nations like the United
States and the European Union steel due to government subsidization (Vineles, 2017). The
Chinese government has also heavily subsidized its paper production by more than $33 billion.
This has enabled China to be the top paper producer in the world though it has no economies of
scale and its forests are small. It sells its paper cheaply compared to the United States and the

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European Union (Freytag, 2017). This act of protectionism has made many nations like the
United States to retaliate and impose heavy tariffs on Chinese products like steel and aluminum
under the leadership of President Donald Trump.
iv. Standardization
Standardization refers to a situation whereby the government of a given nation sets
certain guidelines which must be adhered by foreign products. Foreign products below the set
standards are barred from entering the nation. For instance, the United States of America requires
French cheese made of raw instead of pasteurized milk to be aged for a period of 60 days. Since
the production of young cheese requires at least 50 days, most French cheeses are hence banned
providing the American local manufacturers to compete favorably with the pasteurized versions
(Hise & Choi, 2016).
v. Devaluation
Devaluation is a protectionism measure whereby nations lower the value of their
currencies. This makes imported products costly to local consumers (Krugman & Taylor, 2018).
This reduces the demand for imported goods and services in the nation while on the other hand,
the demand for the equivalent locally produced products increases since they are cheaper. The
nation’s exports also sell much since they are cheaper internationally due to the lowered currency
value. As a result, the nation’s exports are preferred to those of other nations due to their low
costs. This makes the local industries to expand their operations in order to cater to the increased
demand for their products both locally and internationally. A nation involved in devaluation may
experience better terms of trade in the short run as exports exceed imports but in the long run
inflation in the nation is likely to heighten domestic products prices and lowering imports prices
(Feenstra, 2014).
vi. Voluntary Export Restraints
Voluntary export restraints refer to government set limits on certain types of goods to be
exported to a given nation (Hufbauer & Oegg, 2016). This happens in order to protect certain
industries from foreign competing imports. An example is the restrictions imposed by the
Japanese government for exporters from the nation to export a limit of 1.68 million cars to the

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United States after the automobile industry of the United States was threatened by cheap fuel-
efficient cars from Japan.
vii. Preferential government spending
This refers to a situation whereby the government determines which products to buy from
a given nation. For instance, the Buy American Act which was formed by the government of the
United States requires the American government to prefer purchasing products made in the
United States in its expenditure budget (Evenett & Fritz, 2017). This enables the government to
boost the local industries by purchasing their goods and services.
The cases for (advantages) of protectionism
Trade protectionism has various merits to a nation which are experienced only in the
short run period but in the long run period, protectionism can really harm a nation’s economy.
The following are the merits of protectionism:
i. Creation of more growth opportunities for the domestic industries
Protectionism enables domestic industries to expand their operations. This is due to the
fact that protectionism leads to increased demand for locally produced goods and services (Lang,
2014). Imports are restricted hence local consumers consume much of the local goods and
services. Export prices are also lowered for example due to export subsidization. This enables the
domestic exporters to sell their goods and services at relatively lower prices in the international
market hence winning a large market share as compared to their competitors. The overall effect
is that domestic industries have to expand their operations in order to cater to the growing
demand for their products both locally and internationally.
ii. Correction of the balance of payments deficit
Protectionism enables a nation to correct unfavorable balance of payments which occurs
when a given nation imports much than it exports. This is due to the fact that protectionism
enables a nation to restrict and hence reduce imports (Dekle, Eaton & Kortum, 2017). It also
creates an environment which improves its exports for example subsidization of exports. For
instance, the United States has a balance of payments deficit of more than $375billion with

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China. The government of the United States under the leadership of President Donald Trump has
taken a move to reduce this trade deficit by introducing various heavy tariffs on Chinese goods
and services entering the nation. Trump introduced tariffs of 25 percent on steel and 10 percent
on aluminum from nations like China, the European Union and Canada. He also went a set
further and introduced tariff worth $200 billion of Chinese products during the year 2017.
iii. Protection of local industries
Protectionism enables a nation to protect its local industries more so the key industries if
threatened by foreign industries. This enables a nation to avoid the collapsing of its key
industries which act as the nation’s security. For example, President Donald Trump during the
year 2017 introduced 25 percent tariffs on steel and 10 percent tariffs on aluminum from China
and other nations like the European Union and Canada in order to protect the steel manufacturing
industries in America. Nations like China threatened the United States steel production by selling
their steel at 25 percent less amount due to heavy subsidization on their steel production.
iv. Higher gross domestic product and creation of job opportunities
Protectionism enables a nation to boost its gross domestic product growth as local
industries expand their operations due to increased demand for its products both locally and
internationally. The expansion of local industries due to protectionism creates more jobs for
citizens of a given nation as more workers are recruited to take part in more production of goods
and services to cater for the growing demand in the nation’s economy.
The case against (demerits) of protectionism
i. Creation of trade war
Protectionism can lead to a trade war between nations especially if trading partners
affected by the protectionism move possibly retaliate and counter the move. Trading partners
whose exports are affected by the protectionism move adopted by a given nation may collaborate
and react to the nation’s protectionism decision. For instance, the United States protectionist
policies introduced by President Donald Trump led to a trade war between various nations
especially the targeted ones such as China, the European Union, Mexico and Canada. The United

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States introduced tariffs on May 2018 of 25 percent on steel and 10 percent on aluminum from
these nations in order to protect its steel manufacturing sector. The nations retaliated and
imposed equivalent tariffs on American products. For instance, China introduced 25 percent
tariffs on 128 agricultural products from the United States such as wine, nuts, soybeans and fruits
(McGee, 2016). This has highly disadvantaged the United States as many nations are against its
move and it stands to lose much in the future if an immediate solution is not found.
ii. Higher prices and limited consumer choice
Protectionism reduces the number of goods and services available for local consumers as
imports are restricted. This means that consumers are left with a few goods from which to make
their purchase decision. Availability of a few goods and high demand for the few goods increases
the price for the goods. This is a demerit to the final consumer as they have to bear the higher
prices for goods and services. For example, when President Donald Trump imposed 25 percent
and 10 percent tariffs on steel and aluminum respectively from nations like China and the
European Union among others, the United States companies which needed raw materials like the
car makers witnessed a decrease in raw materials and the few available ones being sold at higher
costs (Irwin, 2017).
iii. Inefficiency in production
Comparative advantage in production is distorted by protectionism. Distortion of
comparative advantage discourages specialization in production. As a result, lower quality
products may be produced which are sold to consumers at higher costs (Ito, & Krueger, 2016).
iv. Lack of advancement in technology
Domestic industries and businesses are reluctant to adopt new technologies in production
due to a lack of foreign competition (Gibson, 2014). As a result, a nation which protects its
industries is likely to face sluggish advancement in technology.
Conclusion
Protectionism is a two-way edged sword. It has both advantages and disadvantages.
Disadvantages are severe as compared to advantages and hence protectionism is likely to harm a

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nation’s economy in the long run period. Protectionism denies a nation the benefits associated
with free international trade such as obtaining quality cheap goods and services from nations
which have a comparative advantage in producing them. Protectionism causes a trade war
between a given nation and the targeted nations. A nation protecting its industries is likely to
suffer more as the targeted nations may collaborate against it. In the long run period,
protectionism is likely to lead to sluggish economic development in a given nation due to
inefficiency in production as the protected industries care less about foreign competition. This
will automatically lead to the production of low-quality products which are sold to local
consumers at higher prices. In a nutshell, protectionism has a negative impact on a nation’s
economy in the long run period and hence free trade policies should be adopted whereby
protectionism is allowed only when necessary.
References
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Casella, A. (2015). Free trade and evolving standards (No. 1204). CEPR Discussion Papers.
De Melo, J., Tarr, D. G., & Mundial, B. (2017). Welfare costs of US quotas on textiles, steel, and
autos (No. 83). Country Economics Department, World Bank.
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