Protectionism: A Brief Explanation

by | Jan 10, 2023

International trade policy changes can affect many aspects of society. This can include your investment portfolio or even the profitability of your business if you are an entrepreneur. One way that national governments react to changing macroeconomic factors is through making changes to international trade policies. Protectionism is one trade policy direction that a national government may decide to take that can be quite impactful for many people and businesses. 

Definition of protectionism 

When governments implement policies that restrict international trade in order to benefit domestic industries it is referred to as protectionism. This policy stance aims to protect domestic companies from competition from foreign competition. Usually, government protectionism is meant to boost domestic economic activity, however protectionist policies can be prompted by quality and safety reasons. 

There are several different types of protectionist policies that a government can choose to put into place. The following are some protectionist tools available to governments. 

Levying tariffs 

Tariffs, a main protectionist policy tool for governments, are fees charged to importers from foreign countries on products being imported into the domestic marketplace. The objective is to raise the cost of doing business for importers which would pressure importers to increase retail prices in order to make up for the cost of the tariffs. This would make importers less competitive in the market, therefore boosting domestic industry competitiveness. 

Imposing import quotas 

Another protectionist policy tool governments have at their disposal is to impose import quotas. By imposing quotas governments are setting limits on the quantity of specific products that importers are allowed to bring into the domestic market. By limiting supply import quotas can have a small effect on prices while also increasing demand for domestic competitors when consumers try to make up for the lack in supply. 

Increasing product standards 

Governments have the option of enacting product standards through their internal regulatory apparatus. This can be used as a protectionist strategy which raises product standards that are higher than other countries. Importers from those countries will be forced to increase their costs to fulfill the higher product standards which will make them less competitive, especially if increased costs are passed along to consumers via retail price hikes. Some importers will end up not being able to enter the domestic market due to the higher product standards, which means less competition for domestic producers. 

Providing governmental subsidies 

By providing domestic producers subsidies, governments can financially assist domestic industry by increasing available resources for their business operations. Government subsidies can be either direct or indirect. Direct subsidies are cash payments made directly to domestic companies. On the other hand, indirect subsidies are usually tax breaks or zero interest loans. These various types of governmental subsidies put domestic industry in stronger financial positions which allows them to better compete in the international marketplace. 

How does protectionism affect you? 

Protectionist policies can affect your investment portfolio in various ways. The specific industries the government is aiming to benefit may experience appreciation in stock values and higher dividends paid to investors than they would otherwise. If you are a business owner, protectionist policies can help your domestic business be more competitive in the global market. On the other hand, protectionist policies can hurt some types of businesses that may rely on imported inputs to provide their products or services to consumers.