Protectionism
A tariff is an excise tax levied on imported goods. Originally imposed to raise government revenue, modern tariffs are now used primarily to protect domestic producers and wage rates from lower-priced importers. An import quota is a limit on the volume of a good that may be legally imported, usually established through an import licensing regime. Governments also use administrative barriers regarding food safety or environmental standards as ways to introduce barriers to imports. Anti-dumping legislation prevents the import of cheaper foreign goods that would cause local firms to close down. Direct subsidies take the form of lump-sum payments or cheap loans given to local firms that cannot compete well against imports. Export subsidies increase the amount of trade by giving exporters payment which is a percentage or proportion of the value of exported goods. Exchange rate control involves a government intervening in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market.
There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare. Free trade and the reduction of trade barriers have a significantly positive effect on economic growth. Mainstream economists instead support free trade because it creates more jobs than it destroys. The principle of comparative advantage shows that gains from free trade outweigh any losses. Economist Stephen P. Magee claims the benefits of free trade outweigh the losses by as much as 100 to 1. Protectionism results in deadweight loss which gives no one any benefit unlike in a free market where there is no such total loss. A 2016 study found that trade typically favors the poor as they spend a greater share of their earnings on goods. Free trade reduces the costs of goods for consumers. Harvard economist Dani Rodrik argues that erecting trade barriers will help in only a limited set of circumstances and that trade policy will rarely be the best response to problems of globalization.
Europe became increasingly protectionist during the eighteenth century with European trade policies being almost universally protectionist after the Napoleonic Wars. Economic historians Findlay and O'Rourke note that countries like the Netherlands, Denmark, Portugal and Switzerland had fully moved towards free trade prior to 1860. The repeal of the Corn Laws in 1846 marked a decisive shift toward free trade in Britain. A 1990 study by Jeffrey Williamson showed that the Corn Laws substantially increased the cost of living for British workers. The 1860 Cobden Chevalier treaty between France and the United Kingdom was followed by numerous free trade agreements including treaties signed with Belgium in 1861 and Italy in 1863. By 1877 Germany had virtually become a free trade country with average duties on manufactured products declining to 9, 12% on the Continent. Some European powers did not liberalize during the 19th century such as the Russian Empire and Austro-Hungarian Empire which remained highly protectionist. The Ottoman Empire also became increasingly protectionist despite previously having liberal free trade policies during the 18th to early 19th centuries.
The history of U.S. trade policy can be divided into three distinct eras each characterized by the predominance of one goal. From 1790 to 1860 revenue considerations dominated as import duties accounted for approximately 90% of federal government receipts. President Thomas Jefferson initiated a notable policy experiment by enacting a complete embargo on maritime commerce beginning in December 1807. The embargo imposed significant economic costs estimated at approximately 5% of GDP. From 1861 to 1933 the growing reliance on domestic taxation shifted the focus of tariffs toward protecting domestic industries. Average tariffs increased to 40, 50% during the Civil War and remained at that level for several decades. The Tariff Act of 1930 commonly known as the Smoot, Hawley Tariff raised the average tariff on dutiable imports from approximately 40% to 47%. From 1934 to 2016 the primary objective of trade policy became the negotiation of trade agreements with other countries. The Great Depression led to a political realignment following the Democratic victory in the 1932 election which ended decades of Republican dominance.
Protectionism has been attributed as a major cause of war with proponents pointing to constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist. According to a slogan of Frédéric Bastiat when goods cannot cross borders armies will. The Opium Wars were fought between the UK and China over the right of British merchants to engage in the free trade of opium. For many opium users what started as recreation soon became a punishing addiction. Barbara Tuchman says both European intellectuals and leaders overestimated the power of free trade on the eve of World War I. They believed that the interconnectedness of European nations through trade would stop a continent-wide war from breaking out. However the assumption proved incorrect as Helmuth von Moltke the Younger refused to even consider economic consequences in his plans arguing he was a soldier not an economist. Archaeologist Lawrence H. Keeley argues in his book War Before Civilization that disputes between trading partners escalate to war more frequently than disputes between nations that don't trade much with each other.
Heads of the G20 meeting in London on the 2nd of April 2009 pledged We will not repeat the historic mistakes of protectionism of previous eras. Although they were reiterating what they had already committed to in the 2008 Washington G20 summit 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken through late 2009 were distorting global merchandise trade by 0.25% to 0.5%. Since then President Donald Trump announced in January 2017 the U.S. was abandoning the TPP deal saying We're going to stop the ridiculous trade deals that have taken everybody out of our country. President Joe Biden largely continued Trump's protectionist policies and did not negotiate any new free trade agreements during his presidency. The 2010s and early 2020s have seen an increased use of protectionist economic policies across both developed countries and developing countries worldwide. Certain policies of First World governments have been criticized as protectionist such as the Common Agricultural Policy in the European Union.
Common questions
What is protectionism and how does it restrict imports?
Protectionism is an economic policy that uses tariffs, import quotas, administrative barriers, anti-dumping legislation, direct subsidies, export subsidies, and exchange rate control to restrict imports. These measures aim to protect domestic producers and wage rates from lower-priced foreign competitors.
Why do economists say protectionism harms economic growth?
Economists state that protectionism creates deadweight loss which benefits no one unlike free markets where such total loss does not exist. A 2016 study found trade typically favors the poor as they spend a greater share of their earnings on goods while free trade reduces costs for consumers.
When did Europe shift from protectionism to free trade in the nineteenth century?
Europe became increasingly protectionist during the eighteenth century but countries like the Netherlands Denmark Portugal and Switzerland moved toward free trade prior to 1860. The repeal of the Corn Laws in 1846 marked a decisive shift toward free trade in Britain followed by treaties signed with Belgium in 1861 and Italy in 1863.
How did U.S. trade policy change between 1790 and 2016?
From 1790 to 1860 revenue considerations dominated import duties accounting for approximately 90% of federal government receipts before shifting focus to protecting domestic industries from 1861 to 1933. From 1934 to 2016 the primary objective became negotiating trade agreements after the Great Depression led to political realignment following the Democratic victory in the 1932 election.
What is the relationship between protectionism and war according to historical evidence?
Protectionism has been attributed as a major cause of war with proponents pointing to constant warfare in the seventeenth and eighteenth centuries among European countries whose governments were predominantly mercantilist. Archaeologist Lawrence H. Keeley argues disputes between trading partners escalate to war more frequently than disputes between nations that do not trade much with each other.
Did G20 leaders stop protectionist measures after their 2009 pledge?
Heads of the G20 meeting in London on the 2nd of April 2009 pledged they would not repeat historic mistakes of protectionism yet 17 of these 20 countries imposed trade restrictive measures since then. Economists estimated new measures taken through late 2009 distorted global merchandise trade by 0.25% to 0.5% while President Donald Trump announced in January 2017 the U.S. was abandoning the TPP deal.