Protectionism — good or bad?

Economists have always been debating on whether protectionism works well for a economy, but there are some factors which can helps us arrive at a decision. With trade wars at a all time high, let’s look if such methods actually benefit or harm the economy

For the uninitiated, protectionism is a way by which the government of a country guards domestic businesses from foreign competition generally by imposing tariffs on the imported goods. This causes the cost of importing items to increase and this cost is finally borne by the customers (i.e the citizens of the country)

Now at a first look, protectionism might make complete sense. Obviously we want our local business to thrive and why should they be out of business because someone in let’s say China invent a faster and efficient way to make the same product. But let’s keep aside the sentiments of local businessmen who would obviously find it difficult to survive in the short run and look at a more broader impact of it on the economy, let’s start with the negatives

It harms the consumer

I will explain it with an real life example. The US governments had pressure from local tomato manufacturers that they were going out of business because people are buying tomatoes coming from mexico as they were cheaper (mexico has cheaper labour, utilities and capital costs). Bowing to this US started imposing tariffs on tomatoes know as the “Tomato trade war”

Now coming to the repercussions of this decision, tomatoes prices rose for the consumers and did the local businesses benefit? Yes in the short term they had competitive prices but the result was people were getting lower quality tomatoes as mexico has a much better climate and infrastructure for tomato production. So in general the effects for the consumers were 1) higher prices and 2) lower quality. This could not be seen as a win and hence US went back to end the tariffs and ease the war

It causes harm to the exporters and starts Trade wars

Let’s say your country has put up protectionism to safeguard domestic suppliers. This would lead the country you were importing from to lose market share and revenue due to increased prices. Now coming to the GDP formula

GDP = C + I + G + X-M

Now the protectionism causes direct impact on the X (exports) for the country that has tariffs imposed on them, this would have direct impact on their GDP considering other factors remain same. They would likely retaliate and put tariffs on your country and this is how trade war begins as we are seeing between USA and China currently. This started with USA imposing tariffs on China after it wanted to solve its trade deficit (importing more than exporting) problem

It might lead to businesses not innovating

With the government helping the businesses they might not feel the need to increase efficiency and might chose to remain as they were in absence of any competition, this is not beneficial for the economy as it does not contribute to any growth

Now coming to the positives…..it is not all that bad

Baby industries need it to be given a fair chance

When you have a budding industry who has just started to grow, let’s say electrical vehicles in India. They are not capable of competing with foreign competition like that with China just yet because they have not started and China is already so much ahead

To male economy growing in the long run, you need to have domestic infrastructure for things so you don’t have to depend upon others in time of crisis (for eg — Imagine if a country is importing weapons from a country it goes to war with, they would be at such an unfair side of the war)

Protectionism gives these businesses a fair chance to grow and develop

It generates employment

As the local businesses thrive, it would generate more jobs and that would increase the way of living within the economy

But this benefit is short termed as when the exporting country retaliates the local people who depend on exports would lose jobs as well

Conclusion

Protectionism is necessary at times when you want to develop an infrastructure for something that is in the initial phases of development as a country should always have ways to be self dependent

But in longer run protectionism does more harm to the economy than good as free trade is always better for businesses to thrive

The immediate losers are consumers, as they are the ones compromising on quality and paying higher prices. If businesses are not able to compete (like tomatoes in USA) then it would be better for them to find other sources of employment. This would cause problems in the short term but is better for everyone in the long term

Trade wars are direct implications and in the current economy is only harmful to both the nations