Protectionism is a policy adopted by some countries to protect domestic industries from global competitors by imposing some restrictions on trade of goods and services between countries. In this policy government of that particular country increases tariffs (import taxes), Quotas, Embargoes (a complete ban on imported goods), import licensing, subsidies, exchange controls etc to increase prices of imported products which make them expensive and less attractive. Countries using protectionism when they feel that their industries are getting damage from unfair global competition. In short-term, it work like a defensive measure but if it remains for long-term may ruin the industries trying to protect as less competitive on global marketplace.
Benefits of Protectionism
If protectionism is use for short term as a protective measure it can give following advantages.
- If a country wants to grow in a new industry, protectionism is good to adopt in such conditions as it will protect the new growing industry from already established foreign competitors. This will give a time to new industries to learn and develop competitive advantage.
- Protectionism also beneficial in lowering ratio of unemployment in a country. It is because companies are restricted by tariffs, quotas and other methods which compel them to hire local workers.
Disadvantages of Protectionism
In long-term, protectionism has lots of disadvantages or threats for home industry.
- As there is no competition in protectionism, it makes industries weak in terms of innovation and improvement.
- It also results in more layoffs and burnout.
- Consumer dissatisfaction also arises with long-term protectionism as they have to pay more for a bad quality or low quality product.
- Protectionism restricting industries from innovation and over-specialization which in turn results in unemployment.
- It also results in trade war, as action of imposing protectionism by one country will result in retaliatory by other companies. Retaliatory actions mean an increase in cost of importing of new technologies.