The most common, and most overt, forms of protectionism are tariffs (taxes) or quotas (quantity restrictions) on imports. These trade barriers protect the domestic economy from imports due to either higher prices or limited quantities. Protectionism also takes the form of government regulations that make imports from the foreign sector more difficult.

The arguments for protectionism are usually advanced by domestic producers that face the greatest competition from imports and thus have the most to gain from trade barriers.

The Downside of Foreign Trade

There are, however, problems that arise from international trade. While nations, in the aggregate, benefit from trade, all parties do not benefit equally. And some parties are actually harmed.

• Domestic consumers might be better off with imports as they pay lower prices and have access to more goods, but, domestic producers, especially those competing with imports, are usually worse off. They receive lower prices and sell less output.


• The harm to domestic producers extends to the owners of the resources -- labor, capital, land, and entrepreneurship -- used in production. With less output produced, fewer resources are needed. With lower prices received, payments to the resources are also less. Workers face unemployment and lower wages. Entrepreneurship and stockholders receive less profit.


• The harm also extends to others not directly engaged in production. Firms, and their resources, that supply intermediate inputs to the primary producers also suffer with fewer sales, lower prices, and less revenue. And in the communities where the producers are located, various supportive activities (retail stores, newspapers, movie theaters) have a drop in productive activity and local governments receive less tax revenue.

The Upside of Protectionism

• Domestic Employment: One of the most common protectionism arguments is to protect domestic employment. Foreign imports provide competition with domestic production. To the extent that domestic consumers purchase imports rather than domestic production, domestic production declines and so too does domestic employment. It follows then that restrictions on imports prevent the reduction of domestic production and domestic employment. Key to this justification is that production is provided by citizens of the domestic economy, who pay taxes and vote, rather than foreign workers.


• Low Foreign Wages: Those who argue for protectionism often contend that other countries in the foreign sector gain a comparative advantage due to low wages paid to their workers. These low wages then prevent domestic producers and their workers from competing on a "level playing field." These low foreign wages might be the result of a "natural" comparative advantage based on the economic structure of a foreign country or caused by "artificial" subsidies or other policies undertaken by foreign governments. As such, domestic workers need to be protected from restrict low wage (read this as "cheap") imports.


• Infant Industry: Another protectionism argument is to protect relatively young domestic industries that are not mature enough nor large enough to compete with larger, more mature foreign producers. These "fledgling" industries have not been around long enough to create brand name recognition, benefit from economies of scale, and develop stable input supplies. Trade barriers then protect infant industries from foreign competition while they mature and develop.


• Unfair Trade: Protectionism proponents also contend that foreign firms often engage in unfair trade practices that "unlevel" the competitive playing field. A common contention is that foreign imports are sold in the domestic economy at prices below actual production cost. This practice of "dumping" might be undertaken to drive domestic producers out of business, lessen competition, and increase the market share of the foreign producers. In addition, foreign imports might be sold at unfairly low prices because foreign governments subsidize their producers. Trade barriers prevent foreign producers from unfairly gaining a competitive advantage in the domestic economy and help to level the playing field.


• National Security: A last noted argument for protectionism is that domestic firms and industries produce output vital to the security and defense of the nation. Should the nation import a significant amount of goods used for national defense and should the foreign producing nations decide to restrict imports, then the nation would be vulnerable. The nation needs to be protected from security problems caused by depending on these imports.

For example, the infant industry argument is frequently used to justify the protection of large, dominant, and MATURE domestic firms. The national security argument is also occasionally used to protect industries that have almost nothing to do with the security of the nation.

In fact, the domestic employment and low foreign wages arguments are really a recognition that foreign producers have a comparative advantage, an advantage which the domestic economy can benefit from when engaging in foreign trade. Moreover, the charge of unfair trade practices directed at foreign producers might be little more than lower production costs enabled by comparative advantage.

Policies of Protection