The chart makes this case quite clearly, pointing out the death toll in wartime if economic levers are utilized. Infant Mortality in Iraq During Sanctions : This graphic underlines the indirect consequences of employing economic levers i. While the justification for these figures is complex, including other war-related factors, the correlation is quite clear. Combining these ideas, it is clear that there is substantial national security value to trade protectionism.
However, the opportunity cost of leveraging the ever-growing global markets make this an unattractive prospect if taken to any extreme, as the benefits of global trade rapidly offset the risk of economic dependency upon hostile nations. Economic markets are inherently competitive and newer economies are vulnerable to their more developed counterparts in other countries. Trade protectionism is defined as national policy restricting international economic trade to alter the balance between imports and goods manufactured domestically, usually executed via policies and governmental regulations such as import quotas, tariffs, taxes, anti-dumping legislation, and other limitations.
The primary purpose for this system is as the name implies: protection. Economic markets are inherently competitive, and newer economies are highly vulnerable to their more developed counterparts in other countries for a variety of reasons. The infant industry argument is that new industries need protection until they have become efficient enough to compete in the world market.
Despite the standard argument from mainstream economists postulating that free trade and open markets is the ideal system to allow for capitalistic development, there are many economists who believe that some degree of protectionism is the only way to minimize income gaps and substantial inequity from economy to economy see. The primary advantage to countries with higher economic power and bigger corporations is simply economies of scale and economies of scope, in addition to being further along the experience curve.
Economies of Scale : The basic premise behind economies of scale is that higher production quantity reduces cost per unit, ultimately allowing for the derivation of economic advantage in the market.
Infant industries generally do not have the capacity to do this. GDP by Country : This map demonstrates the vast difference in overall economic power across the globe, underlining the inequities that need to be addressed in economic policy formulation. History has proven the value of protection for the countries employing tariff-based international trade policies. Alexander Hamilton first pointed out the inequities of developing economies with young industry in , which was later picked up and developed by Daniel Raymond and Friedrich List in the 19th century.
Around this time frame, the United States was employing heavy tariffs to protect their fragile economic system as the economy began to achieve autonomy after British rule. Indeed, Britain employed similarly protectionist policies during this time frame, setting the tone for large economic expansion in the longer term. Of course, protective policy while industry develops domestically is not a cure all. While this seemed practical, what ended up happening was quite damaging for Brazil.
Technology advanced rapidly, and without strategic alliances on a global scale, Brazil largely missed out on these advances. This protectionism seems to have damaged industry prospects on a global level for Brazil in this scenario.
From a broader and more far-reaching perspective, protectionism as a general principle has been heavily criticized even in infant industry situations. The reason for this is quite simply the significant jump in prosperity as international trade expanded, and the huge capacity for specialization, economies of scale, technology sharing, and a host of other advantages that have been a direct result of free global markets.
The problem still remains, however, that this prosperity is often unregulated and of the greatest benefit to the influential players in established economies, sometimes at the expense of exploitation of developing nations cheaper labor, reduced governmental oversight, etc.
As a result of this, protecting infant industries can benefit the nation employing them, but generally with the opportunity cost of global value. One of the strongest arguments for trade protectionism is unfair competition emerging due to differences in policy and enforcement ability. Protectionist policies are a highly charged topic in economic debates, as economies work to attain the optimal balance of free trade and trade protectionism to capture the most value.
In many ways, the global markets are torn between pursuing what is best on the global level and what is best at the domestic level, and there is sometimes dissonance between the two. One of the strongest arguments for some degree of trade protectionism is the tendency for unfair competition to emerge, particularly in developing markets without the infrastructure to monitor their businesses and enforce penalties.
This is called the unfair competition argument. A popular recent topic is anti-dumping policies directed at international players looking to undercut domestic business through selling at dramatically reduced prices. This can be a substantial threat, particularly from economies where labor laws are lax and workers are exploited to create extremely low cost goods. This is also a risk when governments get too involved in business, a criticism often pointed out in China.
Governments can provide subsidies to reduce costs for domestic companies. This can also be a threat in infant industries, where larger and more established players can push out smaller players via undercutting prices, absorbing losses until the competition goes bankrupt.
Offsetting this threat has been an ongoing struggle, with the emergence of international trade agreements and organizations like the World Trade Organization WTO playing an increasingly large role. The first is a domestic subsidy that provides domestic suppliers with funds to help reduce prices. By providing money to local businesses to help keep prices down, it makes them more competitive against imports. This tool can be seen as slightly less aggressive and restrictive as it freely allows imports to come in.
Yet at the same time it increases the competitive power of domestic businesses. The route is different, but the goal and results are the same. If we now look at the second type of subsidy — an export subsidy. This is where government funds domestic suppliers to export their goods. In other words, government is paying so that its domestic firms export to other nations.
The aim is generally to reduce consumption at home and protect consumers. Export subsidies contrast to domestic subsidies in the fact that it looks to shift consumption abroad. Yet at the same time the goal is still to preserve the domestic firm. Some nations use strict FDI restrictions in order to prevent foreign nations entering the market.
For instance, China requires some industries to link up with local suppliers before they are allowed to sell their goods. Elsewhere, India places investment caps on specific industries. For instance, media industries are only allowed to invest up to 24 percent , whilst FDI is completely banned in industries such as real estate and most agriculture markets.
By controlling the exchange rate, a nation is able to dictate how much imports can cost. For instance, if the currency strengthens in relation to other currencies; imports will become cheaper as a result. There are several ways by which nations do this. One example includes printing and dumping currency onto the foreign exchange market. In turn this increases the supply in the market, thereby reducing its value.
Alternatively, a nation may buy up the supply of other currencies. As this reduces the supply, it contrastingly increases its value. In turn, this decreases the value of the domestic currency, thereby increasing the price of imported goods. Nations can prevent goods from coming in simply by imposing strict regulatory requirements.
For instance, a banana has to be a certain size and shape, or a motor vehicle must have certain components attached. On occasion, regulations can be so strict that importers would have to specifically manufacture goods for that nation.
A new production process would need to be created to fulfill the requirements. Consequently, it has the intended effect. Protectionism is defined as the restriction of international trade in order to benefit the domestic industry. Now, whilst protectionism has slowly faded away, particularly after the creation of the World Trade Organisation WTO , it has started to gain some traction again in recent times. One of the original aims of protectionism was to protect industry and jobs.
The argument rests of the fact that if international competitors are allowed to compete, then domestic firms will be destroyed. This argument is particularly pronounced in developing nations. For instance, a country like Vietnam would face fierce competition from brands such as Nike, Apple, and the like. If such developing nations let these big companies in, then a small business will not stand a chance. Even so, the argument carries over to developed nations as well.
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World Economy Trade Policy. Table of Contents Expand. Table of Contents. Definition and Examples of Trade Protectionism. How Trade Protectionism Works. Advantages and Disadvantages. By Kimberly Amadeo. Learn about our editorial policies. Reviewed by Thomas J. Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
Learn about our Financial Review Board. Advantages Protects a country's new industries from foreign competition Temporarily creates jobs. Disadvantages Companies without competition decline in quality Leads to the outsourcing of jobs Slows economic growth. Thus, while eliminating trade barriers in one sector of the economy will likely result in some job loss in that sector, consumers will spend the resulting savings in other sectors of the economy and hence increase the number of jobs in those other sectors.
Of course, workers in some of the poorest countries of the world who would otherwise have jobs producing textiles, would gain considerably if the United States reduced its barriers to trade in textiles.
That said, there are good reasons to be wary about reducing barriers to trade. The and Bangladeshi fires in textile factories, which resulted in a horrific loss of life, present complications that our simplified analysis in the chapter will not capture.
Watch this video to learn more about different types of trade barriers: tariffs, quotas, voluntary export restraints, and nontariff barriers like health and safety regulations.
It is the primary international mechanism through which nations negotiate their trade rules—including rules about tariffs, quotas, and nontariff barriers. The next section examines the results of such protectionism. Privacy Policy. Skip to main content. Module Globalization and Trade. Search for:. Learning Objectives Describe why governments may justify protectionist policies Explain and give examples of trade barriers, including quotas, tariffs, and nontariff barriers.
Watch It A government may justify protectionist policies for one of the following reasons, which are outlined in this video: Protect domestic jobs. Level the playing field.
Raise additional revenue for the domestic government. National defense—protect some industries in case of time of war.
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