Protectionism

Neoclassical Economic Theory

In neoclassical economics, protectionism is seen to be economically damaging to both the world economy and to the country applying the protectionist measures, except in limited circumstances. By increasing the prices of imported goods, tariffs raise prices for consumers and raise profits for domestic producers. Protecting inefficient domestic businesses poses a net cost to the country as it diverts investment away from where it would be most productive. Adopting a policy of free trade would allow consumers to purchase cheaper imported goods and would in turn lead, through the market mechanism, to a shift in domestic investment away from inefficient industries to those industries in which the country has a comparative advantage. Liberalization of a country's trade policy is [Page 757]therefore economically beneficial but politically difficult, as the benefits are thinly spread among consumers, while a vocal and frequently politically powerful minority group comprised of the owners of the protected industries and their employees are harmed. The lobbying power of these groups is seen in liberal thinking to be the force behind the introduction and maintenance of trade protection.

Economic Nationalism

Protectionism plays a different role in the school of economic nationalism (sometimes known as mercantilism or just protectionism). Here, economic efficiency is subordinated to other political and economic goals, principally that of fostering industrialization through the protection of infant industries in key sectors. It is generally envisaged that once an industry has been established and is able to compete in world markets, the protection should be withdrawn, although in practice this has not always happened.

This policy was used extensively by the United States in the nineteenth and early twentieth centuries to protect industries unable to compete with British exports. After World War II, developing countries adopted a protectionist strategy in an effort to increase their production of manufactured goods and decrease their reliance on the export of primary products. Two strategies were used: import substitution, particularly associated with Latin America and India, in which imports are replaced by domestic production under the protection of high tariffs or quotas, and export-led growth, pursued by the newly industrialized countries (NICs) of East Asia, in which targeted protection is used to nurture export industries.

Import substitution is widely regarded as having been a failure. Heavily protected industries not subject to foreign competition grew to be inefficient and uncompetitive. Consumers paid more for goods of worse quality than those available on the world market. The NICs, by contrast, saw a rapid rise in living standards and a large growth in their manufacturing industries. These developments led in the late 1970s and 1980s to a shift away from import substitution to a more export orientated method of development.

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