Protectionism represents a set of economic policies and measures that governments implement to safeguard their domestic industries and businesses from foreign competition. These policies are primarily aimed at limiting or restricting imports, thereby providing domestic producers with a competitive advantage. Protectionist measures can take various forms, including:
Tariffs: Taxes imposed on imported goods, making them more expensive for domestic consumers and less competitive with locally produced goods.
Import Quotas: Limiting the quantity of specific goods that can be imported, effectively creating scarcity and increasing prices.
Subsidies: Providing financial assistance to domestic industries, making their products more affordable or competitive in international markets.
Trade Barriers: Imposing non-tariff barriers such as technical regulations, safety standards, and administrative procedures that create obstacles for foreign goods.
Currency Manipulation: Intervening in currency markets to devalue one’s currency, making exports cheaper and imports more expensive.
Buy Local Policies: Government procurement policies that favor domestic suppliers over foreign ones.
Export Restraints: Limiting the export of certain goods to ensure domestic supply.
Dumping Regulations: Imposing regulations to counteract foreign companies selling goods below their production cost in the domestic market.
The use of protectionist measures has a long history, dating back centuries. Protectionism often emerges in response to economic, political, or social challenges. Some key historical milestones in the evolution of protectionism include:
Mercantilism (16th-18th Centuries)
During the era of mercantilism, European countries sought to accumulate wealth and power by restricting imports and promoting exports. Governments imposed tariffs and trade monopolies to protect domestic industries and strengthen their economies.
Smoot-Hawley Tariff (1930)
The Smoot-Hawley Tariff Act is a prominent example of protectionism during the Great Depression. It raised tariffs on a wide range of imported goods, triggering retaliation from trading partners and exacerbating global economic woes.
Many developing countries adopted import substitution industrialization (ISI) policies in the mid-20th century. These policies aimed to reduce reliance on foreign goods by promoting domestic industries through protectionist measures.
Contemporary Protectionism
Protectionism has not disappeared in the modern era. Various countries, including the United States and China, have engaged in protectionist policies, sparking trade disputes and tensions in the global economy.
Rationale for Protectionism
Advocates of protectionism put forth several arguments in favor of such policies:
1. Protecting Domestic Industries: Protectionism is often seen as a means to shield domestic industries from foreign competition, helping them survive and grow.
2. Preserving Jobs: By limiting imports and promoting domestic production, protectionism can help retain jobs within a country.
3. National Security: Protectionism can be used to safeguard industries deemed critical for national security, such as defense or energy production.
4. Infant Industries: Protectionist measures can support the development of “infant industries” that are not yet competitive on a global scale.
5. Reducing Trade Deficits: Supporters argue that protectionism can help reduce trade deficits by curbing imports and promoting exports.
Critiques of Protectionism
Critics argue that protectionism can have several adverse effects on economies and international relations:
1. Economic Inefficiency: Protectionism can lead to inefficiencies by shielding uncompetitive industries from competition, resulting in higher prices and lower-quality goods.
2. Reduced Consumer Choice: Restrictions on imports can limit consumer choices and force consumers to pay more for domestic products.
3. Retaliation: Protectionist measures can trigger retaliatory actions from trading partners, leading to trade tensions and potential trade wars.
4. Global Supply Chains: Disrupting global supply chains can harm industries and undermine economic interconnectedness.
5. Resource Misallocation: Protectionism can misallocate resources by diverting them toward less productive industries.
6. Stifling Innovation: A lack of competition can stifle innovation, as domestic firms have less incentive to improve their products.
7. Inequality: Protectionism can exacerbate income inequality by benefiting specific industries or groups at the expense of others.
Contemporary Examples of Protectionism
Protectionist policies and measures are not confined to history; they persist in various forms in contemporary times:
1. Trade Tariffs between the U.S. and China: The trade dispute between the United States and China in recent years included the imposition of tariffs on hundreds of billions of dollars’ worth of goods.
2. Agricultural Subsidies in Europe: The European Union provides substantial subsidies to its agricultural sector, protecting it from global competition.
3. Buy American Policies: The United States has implemented Buy American policies that favor domestic suppliers in government procurement.
4. Brexit and Trade Barriers: The United Kingdom’s decision to leave the European Union led to discussions about trade barriers and customs checks on goods entering Northern Ireland.
5. COVID-19 Export Restrictions: During the COVID-19 pandemic, some countries imposed export restrictions on medical supplies and pharmaceuticals.
Trade Blocs and Protectionism
Trade blocs, such as customs unions and free trade areas, represent a nuanced aspect of protectionism. While they promote trade and economic cooperation among member countries, they can also create barriers to trade with non-member countries. The European Union, for example, has a single market that allows for the free movement of goods, services, and labor within the EU, but it enforces a common external tariff against non-EU countries.
The Future of Protectionism
The future of protectionism remains uncertain, as it is influenced by a complex interplay of economic, political, and social factors. The COVID-19 pandemic, trade tensions between major economies, and shifts in global supply chains have all influenced protectionist sentiments. The outcome of ongoing trade negotiations and the stance of governments toward international trade will continue to shape the landscape of protectionism in the coming years.
Conclusion
Protectionism is a multifaceted economic and political strategy that has played a significant role in shaping economic policies and international relations throughout history. While proponents argue that protectionism can safeguard domestic industries and jobs, critics contend that it can lead to economic inefficiencies, reduced consumer choices, and global trade tensions. The ongoing debates surrounding protectionism underscore the complex and dynamic nature of international trade and the need for careful consideration of its consequences on a global scale.
Key Highlights of Protectionism:
Definition and Forms: Protectionism encompasses policies aimed at safeguarding domestic industries from foreign competition, including tariffs, import quotas, subsidies, trade barriers, currency manipulation, buy local policies, export restraints, and dumping regulations.
Historical Evolution: Protectionism has a long history, dating back to mercantilism in the 16th-18th centuries. Significant milestones include the Smoot-Hawley Tariff Act during the Great Depression and the adoption of import substitution industrialization (ISI) policies in the mid-20th century.
Contemporary Context: Protectionism persists in the modern era, with countries like the United States and China engaging in trade disputes. The rationale for protectionism includes protecting domestic industries, preserving jobs, ensuring national security, supporting infant industries, and reducing trade deficits.
Critiques: Critics argue that protectionism leads to economic inefficiency, reduced consumer choice, retaliatory actions, disruptions to global supply chains, resource misallocation, stifled innovation, and increased inequality.
Examples: Contemporary examples of protectionism include trade tariffs between the U.S. and China, agricultural subsidies in Europe, Buy American policies, Brexit-related trade barriers, and COVID-19 export restrictions.
Trade Blocs: Trade blocs, such as the European Union, present a nuanced aspect of protectionism by promoting trade among member countries while imposing barriers to non-members.
Future Outlook: The future of protectionism is influenced by factors like the COVID-19 pandemic, trade tensions, and shifts in global supply chains. Ongoing trade negotiations and governmental stances will shape the future landscape of protectionism.
Conclusion: Protectionism is a complex economic and political strategy with proponents citing benefits for domestic industries and critics highlighting its adverse effects on economies and international relations. The ongoing debates underscore the need for careful consideration of protectionist policies in the context of global trade dynamics.
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation.
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage. Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth. The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846. Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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