Protectionist Policies: An Introduction (AQA A Level Economics)

The Causes & Consequences of Protectionist Policies

• Free trade aims to maximise global output based on the principle of comparative advantage

• However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes

• This is called protectionism and may take the form of limiting imports, limiting exports, boosting exports, or putting administrative barriers in place

Reasons Countries Adopt Protectionist Policies

Consequences of Protectionism

• The consequences of trade protection are evident from the impact that each form of protection has on the stakeholders

  • These can be summarised in the diagram below

Diagram: Consequence of Protectionism 

Arguments against the use of protectionism measures

1. Reduced choice: Protectionism reduces both the quantity and variety of goods/services available to customers

2. Increased prices: Protectionism either reduces the supply of goods and services, which leads to higher prices, or in the case of tariffs, directly leads to higher prices

3. Increased costs: Manufacturers who rely on imported raw materials face higher production costs. If protectionism is widespread, it may generate inflation in the economy and/or lead to a loss of employment

4. Retaliation: Foreign producers are hurt by protectionism and it is common for their governments to retaliate with their own measures, which further harm free trade

5. Reduction in export competitiveness: Protectionism reduces the need to be efficient or to innovate. Over time, this leads to higher prices and worse quality products which will reduce export sales

6. Resource misallocation: Global welfare is reduced as protectionism shifts production away from more efficient foreign producers to less efficient domestic producers

7. Domestic inefficiency increases: With a reduced level of competition, domestic firms will be less productively efficient and will spend less on research, development and innovation