Meaning of protectionism
Definition
Protectionism: the deliberate use of government policy to restrict imports and shield domestic producers from foreign competition.
Free trade: the exchange of goods and services across borders with no tariffs, quotas or other artificial barriers.
- It works either by raising the relative price of imports or by directly capping the quantity that may enter.
- Every measure sacrifices some of the gains from comparative advantage to pursue a competing objective.
Key Idea
- Protectionism favours domestic producers at the expense of foreign suppliers and, usually, domestic consumers.
- It trades lower efficiency for goals such as jobs, infant industries or a smaller deficit.
- Almost every measure creates winners and losers inside the same economy.
Why governments protect
Definition
Infant industry: a newly established domestic industry too small to yet reap the economies of scale that established foreign rivals already enjoy.
Dumping: selling exports in a foreign market at a price below their cost of production.
- To defend domestic jobs when cheaper imports would otherwise cut home output and employment.
- To shield an infant industry until it grows large enough to compete on cost.
- To safeguard strategic industries such as food, energy or defence.
- To retaliate against unfair practices such as dumping, the sale of exports below cost.
- To ease a persistent current account deficit by curbing spending on imports.
Example
- Imported steel sells at £400 per tonne while home mills need £500 per tonne to break even, so the government adds a 25% tariff.
- At £500 per tonne the imported price now matches home mills, so buyers switch back to domestic steel: jobs are saved, but every steel-using firm pays £100 more per tonne.
How protection works
- Price-based barriers, such as a tariff, raise the price of imports so consumers switch to home goods.
- Quantity-based barriers, such as a quota, cap the volume imported, so the resulting scarcity raises the import price.
- Hidden barriers, such as complex regulations or paperwork, raise the cost and difficulty of importing.
- The specific tools and their impact are set out in the next subtopic.
Note
- Protectionism is the policy aim; tariffs, quotas, subsidies and red tape are the instruments that deliver it.
- Most economies combine broad openness with some targeted protection.
Winners and losers
- Domestic producers gain higher sales, output and profit.
- Domestic consumers lose through higher prices and reduced choice.
- The government may gain tariff revenue, while foreign exporters lose sales.
- Because consumers usually lose more than producers gain, protection tends to reduce total welfare — though it depends on the objective, such as saving a strategic industry.
Exam technique
- Define protectionism precisely as shielding domestic industry from imports.
- Contrast it with free trade and the gains from comparative advantage.
- Identify winners and losers, then judge with an "it depends" on the objective.
Common Mistake
- Do not confuse protectionism, the aim, with the tools used to apply it.
- Do not assume protection benefits the whole economy, as consumers usually bear the cost.
Self review
- Define protectionism and free trade.
- Give three reasons a government might protect an industry.
- Explain how a 25% tariff shifts demand towards domestic producers.
- Identify who gains and who loses from a tariff on steel.
- Why does protection usually reduce total welfare?
