TRADE GROUP ASSIGNMENT

Protectionism Definition
Protectionism in economics is a governmental restriction on
international trade. It is an attempt to protect domestic manufacturers
and industries from international competition. Sometimes tariffs and
quotas are imposed as a safety measure.

Protectionism is the practice of following protectionist trade policies. A protectionist

trade policy allows the government of a country to promote domestic producers, and
thereby boost the domestic production of goods and services by imposing tariffs or
otherwise limiting foreign goods and services in the marketplace.
Trade protectionism is defined as a nation, or sometimes a group of nations working in conjunction
as a trade bloc, creating trade barriers with the specific goal of protecting its economy from the
possible perils of international trading. This is the opposite of free trade in which a government
allows its citizenry to purchase goods and services from other countries or to sell their goods and
services to other markets without any governmental restrictions, interference, or hinderances. The
objective of trade protectionism is to protect a nation’s vital economic interests such as its key
industries, commodities, and employment of workers. Free trade, however, encourages a higher
level of domestic consumption of goods and a more efficient use of resources, whether natural,
human, or economic. Free trade also seeks to stimulate economic growth and wealth creation within
a nation’s borders

Key Takeaways
 Protectionism refers to international trade restrictions initiated by
a country’s government. It is an attempt to boost domestic
economic activities. It can potentially protect local producers
from stiff international competition.
 Restrictions are imposed in the form of tariffs, quotas, and
subsidies. Governments use restrictions to ban or regulate
international trade. This way, domestic businesses get a boost.
 In the long term, trade restrictions tend to backfire. The negative
impacts of isolationism far outweigh the benefits.

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 Economic theorists strongly advocate free trade. Even so, free

trade can harm flourishing economies, invariably leading to job
outsourcing.

Protectionism in Trade Explained

Protectionism policy is an economic stance where a government
imposes trade restrictions to balance competition and boost the
domestic economy. For example, governments use
quotas, subsidies, tariffs, etc., to execute diplomacy to restrict imports
or exports.

Such strategies can be seen throughout history. They are especially

common during wars, recessions, and economic crises, as they are
considered regressive measures. Most economists like the idea of free
trade and globalization. Yet, free trade can harm capitalist
economies—due to job outsourcing.

Protectionism Tools/types
Trade restrictions are broadly classified into four protectionism tools

#1 – Tariffs
Protectionism in trade is majorly influenced by tariffs imposed by
governments on certain products and services. For example, if a
domestic product is more expensive than the imported alternative,
then the government imposes tariffs on imported products.

This gives domestic manufacturers much-needed breathing space.

This way, the sale of domestic products increases, and imported
alternatives find fewer takers (due to the inflated prices). In the long

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domestic manufacturers must have to enhance efficiency and

productivity.

#2 – Subsidies
Governments introduce subsidies to help domestic manufacturers
make quality, subsidized products become competitive and can go
toe-to-toe with products in the international market. This way, the
government helps local businesses boost their income, sales,
and revenue.

#3 – Quotas
Governments set a designated amount—goods exchange is not
allowed beyond the stipulated quantity. For example, a country
can limit the quantity of grain that is imported from outside.
Once the

#4-Standardization
The government of a country may require all foreign products to adhere to certain
guidelines. For instance, the UK Government may demand that all imported shoes
include a certain proportion of leather. Standardization measures tend to reduce
foreign products in the market.

Reasons for Protectionism

An economy usually adopts protectionist policies to encourage domestic investment in

a specific industry. For instance, tariffs on the foreign import of shoes would
encourage domestic producers to invest more resources in shoe production.

In addition, nascent domestic shoe producers would not be at risk from established
foreign shoe producers. Although domestic producers are better off, domestic
consumers are worse off as a result of protectionist policies, as they may have to pay

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higher prices for somewhat inferior goods or services. Protectionist policies, therefore,
tend to be very popular with businesses and very unpopular with consumers.

Advantages of Protectionism

 More growth opportunities: Protectionism provides local industries with

growth opportunities until they can compete against more experienced firms in
the international market
 Lower imports: Protectionist policies help reduce import levels and allow the
country to increase its trade balance.
 More jobs: Higher employment rates result when domestic firms boost their
workforce
 Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a
rise in domestic production

Disadvantages of Protectionism

 Stagnation of technological advancements: As domestic producers don’t

need to worry about foreign competition, they have no incentive to innovate or
spend resources on research and development (R&D) of new products.
 Limited choices for consumers: Consumers have access to fewer goods in the
market as a result of limitations on foreign goods.
 Increase in prices (due to lack of competition): Consumers will need to pay
more without seeing any significant improvement in the product.
 Economic isolation: It often leads to political and cultural isolation, which, in
turn, leads to even more economic isolation
threshold is flanked, imports will be barred.

What Is Free Trade?

Free trade implies a trade policy that does not restrict importing or
exporting goods. It is also possible to interpret it as applying the free
market concept to global trade. It is believed to be good for public as
when trade barriers are eliminated, prices tend to decrease for
consumers.

The key terms of free trade agreements and free trade areas include:

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 Import goods are products that were manufactured from a foreign land and are
brought into another country and consumed by its domestic residents.
 Export goods are the opposite of import goods – a manufacturer located in one
country sells its products to buyers in a foreign country.

Key Takeaways
 Free Trade largely refers to the unrestrained import and export of
commodities and services between nations worldwide.
 It is beneficial for consumers as they get low-price options in
products.
 Protectionism is the antithesis of free trade. It is a very restrictive
trade policy to prevent competition from other nations.
 The vast majority of industrialized countries participate in hybrid
free trade agreements (FTAs), which are multilateral trade pacts
that have been negotiated and allow for tariffs, quotas, and other
trade restrictions while also regulating them.

Free Trade Explained

Free trade, often known as laissez-faire, is a kind of economic policy in
which a nation’s government doesn’t penalize imports or intervene
with exports by laying taxes (on imports) or subsidies.

The concept of free trade is held in high esteem while also drawing
strong opposition. Some individuals believe that it makes everyone
wealthy and fosters growth in nations that were previously not
developed. Others believe it widens existing wealth gaps and grants
companies excessive power.

Free trade definition also refers to the absence of government

intervention in economic markets. In general, economists are in favor
of unrestricted free trade. On the other hand, protectionism has been

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shown to harm economic growth and people’s prosperity. In contrast,

free trade and the elimination of trade barriers have been shown to
affect the economy and economic strength positively. This is a widely
held belief among economists. In the near term, however, trade
liberalization can result in serious and unequally distributed losses
and the economic displacement of workers in industries competing
with imports.

From 1815 to the beginning of World War I, countries’ free trade

policies and practices highly expanded. The 1920s saw a return to a
rise in trade liberalization, which continued until the Great
Depression when it was followed by a precipitous decline (particularly
in Europe and North America). Then, beginning in the 1950s and
continuing ahead, there was a discernible uptick in the degree of
openness to trade (albeit with a slowdown during the 1973 oil crisis).
As a result, economists and economic historians believe the degrees of
openness to trade that exist now are at their greatest level ever
recorded.

Examples
Let us have a look at the examples to understand the concept better.

Example #1
An update by Reuters highlights the status of free trade between the
U.K. and India. Kemi Badenoch, the minister of trade for the United
Kingdom, stated that a trade deal between the United Kingdom and
India could not contain all that the services industry needs as the time
to finalize the pact draws closer.

Prime MInister Boris Johnson has stated in the past that an agreement
with India might result in a doubling of the trade
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and investments between the two nations. Still, the primary focus
needs to be on negotiating a deal that benefits both the United
Kingdom and India and not any particular industry.”

Example #2
A recent article by Asia times focuses on the topic of how to save the
global free trade order in the face of unexpected and complicated
hurdles, such as the competition between the United States and China,
the Russian war in Ukraine, the Covid-19 problem, and climate change.
One way to do this is through local trade agreements, often known
as RTAs.

These aim to increase trade between members by favorably removing

trade hurdles. The alternative strategy entails the promotion of
plurilateral accords, in which nations with similar perspectives agree
on the rules that will govern a subject and forgo the pursuit of WTO-
wide decisions.

Benefits/advantage

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1. Increased Growth
Even when minor limitations, like tariffs, are imposed, all concerned
nations experience increased economic growth. United States yearly
economic growth improved due to its participation in NAFTA (the
North American Free Trade Agreement).

2. Aids Customers
Safeguarding local firms and sectors and trade restrictions such as
tariffs and quotas are enacted. When trade barriers are not present,
prices tend to decrease for consumers because more goods imported
from nations with cheaper labor costs become available locally.

3. Boosts International Investment

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When foreign investors are not confronted with trade barriers, they
tend to invest in local enterprises, helping them develop and compete.
In addition, several emerging and remote nations gain from an
infusion of U.S. investment capital.

4. Decreases Government Expenditures

Governments often support local firms, such as agriculture, for their
income loss from export quotas. In addition, the government’s tax
earnings can be used for other purposes after the quotas are
abolished.

5. Facilitates Technology Transfer

In addition to human skills, local firms receive access to the most
modern technology created by their international partners.

6 Increased efficiency

The good thing about a free trade area is that it encourages competition, which
consequently increases a country’s efficiency, in order to be on par with its
competitors. Products and services then become of better quality at a lower cost.

7 Specialization of countries

When there is intense competition, countries will tend to produce the products or
goods that they are most efficient at. Efficient use of resources means maximizing
profit.

8 No monopoly

When there is free trade, and tariffs and quotas are eliminated, monopolies are also
eliminated because more players can come in and join the market.

9 Lowered prices

When there is competition, especially on a global level, prices will surely go down,
allowing consumers to enjoy a higher purchasing power.

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10 Increased variety

With imports becoming available at a lower cost, consumers gain access to a variety
of products that are inexpensive

Drawbacks/disadvantage

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1. Job Losses Due To Outsourcing

Tariffs tend to deter job outsourcing by keeping product prices
competitive. In addition, the removal of tariffs makes
imported products cost less. While this appears beneficial to
consumers, it makes it difficult for local firms to compete, causing
them to reduce their staff. Indeed, one of the primary criticism of
NAFTA was that it sent American jobs to Mexico.

2. Intellectual Property Theft

Many foreign governments fail to take intellectual property rights
seriously, particularly those in developing nations. As a result, firms’
inventions and new technology are at threat without the protection of
patent laws. It forces them to compete with low priced and locally
made fake items.
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3. Bad Working Conditions

Similarly, governments in poor nations rarely have laws in place to
maintain safe and equal working conditions. Women and children are
often forced to work in industries doing hard labor under difficult
conditions since free trade is largely predicated on a lack of
government strict quotas.

4. Harmful To The Environment

Emerging nations have little, if any, environmental rules. Because many
free trade options entail exporting natural resources such as timber or
iron ore, cutting forests and unclaimed strip mining often ruins local
places.

5. Decreases Revenues
Because of the high competition by unfettered free trade, the firms
engaged experience lower income. Smaller firms in growing nations
are particularly sensitive to this effect.

6 Threat to intellectual property

When imports are freely traded, domestic producers are often able to copy the
products and sell them as knock-offs without fear of any legal repercussions.
Therefore, unless the FTA includes provisions for intellectual property laws and
enforcement there are no protections for exporting companies.

7 Unhealthy working conditions

Outsourcing jobs in developing countries can become a trend with a free trade area.
Because many countries lack labor protection laws, workers may be forced to work in
unhealthy and substandard work environments.

8 Less tax revenue

Since member countries are no longer subject to import taxes, they need to think of
ways to compensate for the reduced tax revenue
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Free Trade vs Protectionism

 The primary goal of protectionism is to shield home firms and
industries from foreign competition. And to prevent the outcome
resulting from free market supply and demand forces. As a
result, open trade is the polar opposite of protectionism.

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 Free trade expands the overall size of the economy. It enables

better production of products and services. Protectionism can
assist in keeping jobs in certain industries or, at the very least,
limit the pace of change.
 Consumers benefit from free trade. It brings down prices by
creating fewer hurdles and encouraging competition. Increased
competition will almost certainly increase quality and choice. On
the other hand, the latter limits customers’ access to localized
enterprises’ offerings.
 Companies that deal in many nations might reduce their
‘compliance’ expenses by working with a single set of laws. But
on the other hand, the latter may lead to bad trade wars. It
increases prices and uncertainty as each party tries to safeguard
its own economy.

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