What is Protection?

In economics, protection refers to the use of policies implemented by governments to restrict or monitor international trade. This is generally done through the implementation of tariffs, quotas and subsidies, with the intent of protecting local businesses and jobs from foreign competition. Protection measures such as these achieve this goal by making imported goods less competitive compared to domestically produced goods. The definitions of these protectionist policies are as follows:

What are the Reasons for Protection?

Protection of an economy essentially has the opposite effect of free trade agreements. This in turn reduces an economy's integration in the global economy. Thus, protectionist policies are implemented for several strategic economic and political reasons:

Infant Industry Argument

The infant industry argument suggests that emerging domestic industries need protection from well-established international competition, until they become capable of competing in the global market. By protecting these industries, governments can help them achieve economies of scale and become more efficient over time. As an example, many countries protect their automotive and technology sectors until they are sufficiently competitive. This also allows an economy to be less dependent on others for certain goods and services.

Domestic Employment

Another reason governments employ methods of protection is to protect domestic employment. For example, by applying tariffs on imported goods such as cars, international businesses will have to increase car prices to maintain profits. As a result, consumers will look to cheaper domestic options, hence facilitating the need for jobs in the domestic automotive industry. For instance, in 2020 the Australian government increased protectionist policies against China, Indonesia and South Korea, on a range of steel products. These measures help to ensure that local manufacturers can compete on a level playing field, thereby protecting jobs in the Australian steel industry.

Dumping

Dumping refers to the situation where a foreign firm sells its products in a domestic market at prices below the cost of production or below the prices charged in its home market. For example, a country will sell fruit to another country at half the price of the fruit produced in the other country's domestic market. As such, governments are forced to implement anti-dumping or protectionist policies to counteract this situation. Generally, protective tariffs are imposed to ensure fair competition and to prevent foreign producers from undercutting local businesses.

Defence

Protectionist policies can also be implemented to improve an economy's defence. Defence refers to the security of a nation and encompasses industries such as defence equipment, energy, or telecommunications. By ensuring the survival of these industries, governments aim to reduce their dependence on foreign suppliers and maintain their ability to respond to security threats. For example, many countries have restrictions on foreign ownership in their defence industries to ensure that critical technologies and capabilities remain under domestic control.

What are the Limitations of Protection?

However, protection also has its drawbacks. It can lead to higher prices for consumers, reduced competition and innovation, and potential retaliation from trading partners. Moreover, the benefits of protection may be granted primarily to the protected industries, while the costs are borne by the wider economy.

Additionally, through methods of protection, domestic industries can become complacent and reliant on government assistance. This becomes a problem when protectionist policies are reduced, and inefficient domestic firms are forced to shut. Therefore, even with the help of protection, domestic firms must maintain efficiency to stay open.