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Protectionism is when a country attempts to impose restrictions on imported goods and services coming into its economy. It is an obstacle to open trade, where barriers are erected by a country with the aim of protecting its own domestic industries. The results of free market supply and demand interactions are therefore obstructed by constraints placed on the trade of goods and services. Hence, the World Trade Organization plays a pivotal role in establishing the rules of trade between member countries. Their key roles include settling trade disputes, overseeing trade agreements, and promoting free and fair trade. Dr. Ngozi Okonjo-Iweala, Director-General of the World Trade Organization (WTO), warns of growing protectionism, suggesting it is threatening global trade, which is “really part of the lifeblood for making countries resilient - and also for underpinning growth, so we are concerned about that”.
Protectionism comes in many forms. One of the most common forms of protectionism is tariffs. Tariffs are when a government places a tax on imports, which are goods and services bought from another country. Tariffs increase prices for consumers, reduce imports, and can provoke retaliation from other countries, impacting global trade. Another way a government may aim to protect trade is through import quotas, which are limits on the quantity of goods and services that can be imported into the country. Quotas reduce imports, boosting domestic sales but raising prices and profits, with risks of retaliatory tariffs and economic harm. Other forms of protectionism include: embargoes (full bans on importing certain goods and services), domestic subsidies (financial support provided by a government to give an advantage over competitors) and administrative barriers.
Check out this video which outlines the forms of protectionism:
In economics, supply and demand are market forces which help determine market prices and quantities bought and sold. Protectionism can play a part in distorting supply and demand. Tariffs increase the cost of imports, reducing supply to a country. In addition, quotas limit imports, reducing their availability to consumers. On the demand side, the protectionist measures typically increase the price of goods and services, in turn reducing consumption and choice for consumers. The interaction of these factors has a significant effect on global trade, where the increased barriers reduce trade between countries. The market equilibrium is distorted in such a way that international trade is not always optimal.
The concept of opportunity cost refers to the value of the next best alternative sacrificed or forgone. Every economic decision involves a trade-off and the allocation of resources. Protectionist policies change opportunity costs by favouring domestic industries, resulting in higher consumer prices and reduced access to a variety of cheaper imported goods. Therefore, one may say protectionism diverts resources away from efficient allocation, potentially lowering economic efficiency. Furthermore, it might trigger retaliatory measures that distort global trade, highlighting the opportunity costs and trade-offs that a government must consider. Comparative advantage is the ability of a country to produce goods or services at a lower opportunity cost than another country.
Have a look at this video if you want to learn more about the concept of comparative advantage
We can measure the benefits of market transactions through the economic concepts of producer surplus and consumer surplus. Tariffs and quotas, forms of protectionism, can increase producer surplus for domestic suppliers. This is because these domestic firms are able to sell an increased amount of goods and services to the domestic market. On the consumer side, the higher prices that happen because of protectionist policies reduce consumer welfare and thus, lower consumer surplus. Additionally, tools, such as quotas, limit the availability and choice of goods and services, adding to the decreasing consumer surplus. Hence, protectionism may result in a redistribution of wealth from consumers, paying higher prices, to domestic producers, benefiting from less competition.
Okonjo-Iweala states that “we are seeing increasing protectionism, some undermining of the WTO rules, and some of this is leading to fragmentation”, which is where global economic integration becomes more disjointed and divided. Overall, this is a challenge to world trade since there may be an acceleration in the use of trade blocks, as Okonjo-Iweala posits , “we're seeing that trade between like-minded blocks is growing faster than trade across such blocks”. This is a worry for the macro economy since WTO research predicts the cost to be 5% of the global economy. It is the role of the WTO to uphold and defend trade measures that keep trade fair, free and flourishing.
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