Definition
Trade Protection
When the government intervenes in international trade by imposing restrictions to reduce free imports.
- Trade protection may offer short-term benefits to some stakeholders while leading to losses for others.
- Regardless, it leads to inefficiencies and negative outcomes in the long run for the economy.
Hence, there are many arguments against trade protection in order to encourage free trade amongst nations.
Arguments Against Trade Restrictions
Misallocation of Resources
- Trade protection leads to an increase in inefficient production from domestic firms, causing a welfare loss as it leads to a waste of scarce resources.
- Therefore, there is a misallocation of resources.
Retaliation
- Trade protection can trigger retaliatory measures from other economies (countries), escalating into a chain reaction of protectionism policies being imposed, leading to trade wars.
- This can harm multiple industries in both economies and reduce overall economic welfare by causing the misallocation of resources to exponentially increase.
Increased Costs
- Trade protection raises the costs of imported raw materials and components, increasing production costs for domestic firms.
- This can lead to offshoring (moving the business to another country) as firms seek cheaper production options abroad.
Higher Prices
- Trade protection measures like tariffs and quotas lead to higher prices for consumers.
- This results in a loss of consumer surplus (explained in 4.2.1 Tariffs and 4.2.2 Quota) and a decline in the standard of living, particularly for low-income households.
Tariffs are often regressive, meaning they disproportionately affect lower-income consumers who spend a larger share of their income on taxed goods.
