Effects of Protectionist Policies
Expert reviewed • 21 July 2024 • 7 minute read
What are the Effects of Protection on the Domestic Economy?
Protectionist policies can have both beneficial and negative effects on a country's economy; these can occur in the short, medium or long-term. Positive or beneficial effects on the domestic economy include:
- Increased Domestic Production: Increased protection causes the price of imported goods to increase. Thus, tariffs can encourage consumers and businesses to purchase domestic products, boosting local production.
- Job Creation and Retention: Protectionist measures can preserve jobs in industries facing overseas competition. This can be particularly important in sectors that are significant for national employment.
- Government Revenue: Tariffs generate revenue for the government, which can be used to fund essential services or further support other economic sectors.
Negative effects of protectionist policies are also highly prevalent. These generally include the following:
- Higher prices for consumers: Trade barriers, such as tariffs and quotas, can increase the prices of imported goods, leading to higher costs for consumers.
- Reduced competition and innovation: Trade barriers can reduce competition in the domestic market, leading to less incentive for firms to innovate and improve their products. This can result in lower productivity growth and slower technological progress.
- Retaliation from trading partners: When a country imposes protectionist measures, its trading partners may respond with retaliatory measures, leading to a trade war. Trade wars can disrupt global supply chains, reduce trade volumes, and harm the domestic economy.
What are the Effects of Protection on the Global Economy?
On a broader scale, the impacts of protectionist policies extend beyond domestic borders, influencing the global economic framework. On a global level, protection is shown to have minimal beneficial effects. The following explore what happens to the global economy when protection is increased:
- Trade Wars: One country's protectionist policies can lead to retaliatory actions from others, potentially resulting in a trade war that can stifle global economic growth. For example, the recent U.S.-China trade war began when tariffs were imposed on billions of dollars' worth of goods, prompting retaliatory tariffs and leading to increased global economic uncertainty.
The following graph demonstrates the effect of this trade war on global trade volumes, as China and the US are two of the biggest global exporters.
As we can see from the graph, trade wars caused by increased protection can be damaging for the entire global economy, not just the countries involved.
- Distortion of Global Markets: By altering the natural flow of goods and services, protectionism can distort market efficiencies and the allocation of resources in the global economy.
- Impact on Developing Economies: Developing countries, often reliant on exports to wealthier nations, can suffer when major economies implement strict trade barriers.
- Global Supply Chain Disruptions: Protectionist policies can disrupt global supply chains by making the import of essential components more expensive or restricted.
- Inefficient allocation of resources: Protectionist policies can distort the global allocation of resources by preventing countries from specialising in the production of goods and services where they have a comparative advantage. This can lead to lower global productivity and economic growth.