Trade protection (protectionism) refers to government policies that restrict international trade to protect domestic industries from foreign competition.

Goal: Shield domestic producers from imports

Effect: Interferes with free trade and comparative advantage

Definition: Tax on imported goods, raising their price in domestic market

Types:

• Specific tariff: Fixed amount per unit (e.g., $100 per car)
• Ad valorem tariff: Percentage of value (e.g., 10% of import price)

Effects of tariffs:

• Price increases: Imported goods more expensive
• Quantity of imports falls: Consumers buy less
• Domestic production increases: Domestic firms can compete
• Government revenue: Tariff collected
• Deadweight loss: Allocative inefficiency (welfare loss to society)

Definition: Physical limit on quantity of a good that can be imported

Example: Maximum 10,000 cars per year can be imported

Effects of quotas:

• Imports limited directly: Cannot exceed quota
• Price increases: Scarcity drives up price
• Domestic production increases: Fills gap left by limited imports
• No government revenue: Unlike tariffs (unless licenses sold)
• Quota rents: Import license holders or foreign exporters gain windfall profits
• Deadweight loss: Even larger than with tariffs (no government revenue benefit)

Definition: Government payments to domestic producers, reducing their costs

Effect:

• Domestic supply increases (supply curve shifts right)
• Domestic producers can compete with imports despite higher costs
• May allow exports at below cost (dumping)

Costs:

• Expensive for government (opportunity cost)
• Inefficient allocation (supporting uncompetitive industries)
• Trade disputes (other countries may retaliate)

Example: Agricultural subsidies in developed countries (EU Common Agricultural Policy, US farm subsidies)

Definition: Regulations and policies (other than tariffs/quotas) that restrict trade

Types:

• Technical standards: Safety, quality, environmental regulations that imports must meet (may be designed to exclude foreign goods)
• Administrative barriers: Complex customs procedures, excessive paperwork
• Sanitary and phytosanitary measures: Health and safety rules for food/plants
• Licensing requirements: Special permits needed to import
• "Buy national" campaigns: Encourage consumers to buy domestic
• Exchange controls: Restrictions on foreign currency for imports

Problem: Often hidden protectionism disguised as legitimate regulation

Definition: Exporting country "voluntarily" agrees to limit exports (usually under political pressure)

Example: 1980s Japan limited car exports to US

Effects: Similar to quotas—raises prices, benefits domestic producers, harms consumers

1. Infant Industry Argument

Logic: New industries in developing countries cannot compete with established foreign firms

• Need temporary protection while learning and gaining economies of scale
• Once mature, protection removed and industry can compete
• Allows diversification away from primary products

Conditions for success:

• Industry must have potential to become competitive
• Protection must be temporary
• Benefits must outweigh costs

Problems:

• Difficult to identify which industries will succeed
• Protection often becomes permanent (political pressure)
• Protected industries become inefficient and dependent
• Consumers pay higher prices during protection period

2. National Security / Strategic Industries

Logic: Some industries too important to depend on foreign suppliers

• Defense: Weapons, military equipment
• Food security: Agriculture (can't risk relying on imports during war/crisis)
• Energy: Oil, natural gas, electricity
• Technology: Critical infrastructure, telecommunications

Argument: National security more important than economic efficiency

Problems:

• Often used to justify protection of politically powerful industries
• Difficult to define "strategic"
• May be inefficient way to ensure security (stockpiling, diversifying suppliers better)
• Undermines comparative advantage

3. Protect Jobs / Reduce Unemployment

Logic: Imports destroy domestic jobs; protection saves employment

• Import competition causes factory closures
• Workers lose jobs, communities devastated
• Protection maintains employment

Problems:

• Other countries retaliate: Protect their industries, reducing our exports → Net job loss
• Higher prices harm consumers: Reduced purchasing power may cost jobs elsewhere
• Inefficient preservation: Resources locked in uncompetitive industries
• Short-term thinking: Delays inevitable adjustment
• Better solution: Retraining and education for displaced workers

4. Anti-Dumping

Definition: Dumping occurs when foreign firms sell products abroad below cost of production (or below domestic price)

Reasons for dumping:

• Get rid of surplus
• Gain market share
• Drive out competition (predatory pricing)

Argument for protection:

• Unfair competition
• Harms domestic producers
• If predatory, creates monopoly power later

Counter-argument:

• Consumers benefit from low prices
• Difficult to prove dumping vs. genuine efficiency
• Predatory dumping rarely successful (hard to recoup losses)

5. Protect Against Unfair Competition

Arguments:

• Low wages abroad: "Race to the bottom," exploitation
• Poor labor standards: Child labor, unsafe conditions
• Weak environmental regulations: Pollution havens
• Foreign subsidies: Create unfair advantage

Counter-arguments:

• Low wages reflect lower productivity and living costs
• Trade can improve standards over time (economic development)
• Protectionism may harm workers in developing countries (lose jobs)
• Better to address through international agreements and standards

6. Raise Government Revenue

Logic: Tariffs generate revenue for government

• Important for developing countries with limited tax systems
• Easier to collect than income tax

Problems:

• Inefficient way to raise revenue (distorts trade)
• Revenue falls as protection succeeds (fewer imports)
• Better to develop domestic tax system

7. Correct Balance of Payments Deficit

Logic: Reduce imports to improve trade balance

Problems:

• Other countries retaliate → Exports fall too
• Doesn't address root causes (competitiveness, exchange rate)
• May reduce national income (inefficiency)
• Better solutions: Improve competitiveness, currency depreciation