It is a defensive measure, and it is usually politically motivated. It can often work, in the short run. However, in the long run it usually does the opposite of its intentions. It can make the country, and the industries it is trying to protect, less competitive on the global marketplace.
Advantages of Protectionism:
- If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors. This allows companies in the new industry time to learn how to produce the good efficiently, and develop their own competitive advantages.
- Protectionism also temporarily creates jobs for domestic workers. As domestic companies are protected by tariffs, quotas or subsidies, they will hire locally.
Disadvantages of Protectionism:
- In the long term, trade protectionism weakens the industry. Without competition, companies within the industry won't innovate and improve their products or services.
- Consumers will pay more for a lower quality product than they would get from foreign competitors.
- Protectionism laws that reduce consumer spending power actually end up destroying jobs.
- It forces you to pay more taxes on imported goods.
Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports). Under a free trade policy, prices emerge from supply and demand, and are the sole determinant ofresource allocation.
'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those which would emerge under deregulation.
Advantages of Free Trade:
- Countries that specialize in creating commodities where they have the comparative advantage will increase their production, instead of focusing on products or industries in which other countries have the comparative advantage. By increasing production, countries increase their efficiency. By specializing, countries better allocate their resources and purchase cheaper resources from other countries.
- Free trade leads to a global market, consumers benefit from the competition and variety brought to the market. When other countries produce some items cheaper, the consumer purchases products for less. It benefits consumers by increased innovations. As free trade expands, competition also expands. To stay competitive, companies must seek ways to create the comparative advantage. This leads to increased innovation that improves products.
- Free trade may cause jobs in one particular industry to wind up overseas, jobs in the exporting and importing sides will increase. When productivity increases in importing and exporting, wages also tend to rise.
- The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels.
Disadvantages of free trade:
- The removal of trade barriers, structural unemployment may occur in the short term. This can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in growth industries and government assistance is necessary.
- Increased domestic economic instability from international trade cycles, as economies become dependent on global markets.
- Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection policies by governments ("Infant Industry").
Protectionism is frequently criticized by economists as harming the people it is meant to help. Most economists instead support free trade.
