Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade are kept to a minimum. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which "protect" businesses and "living wages" within a country by restricting or regulating trade between foreign nations.
Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers. Virtually all modern day economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth. Economist and trade theorist Paul Krugman once stated that, "If there were an Economist’s Creed, it would surely contain the affirmations 'I believe in the Principle of Comparative Advantage' and 'I believe in Free Trade'."
Recent examples of protectionism in first world countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries. Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs.
Some may feel that better job choice is more important than lower goods costs. Whether protectionism provides such a trade-off between jobs and prices has not yet reached a consensus with economists. However, most economists agree that the benefits from free trade in the form of consumer surplus and increased efficiency outweigh the losses of jobs by at least a margin of 2 to 1, with some arguing the margin is as high as 100 to 1 in favor of free trade.
The opposition Democratic Party contested several elections throughout the 1830s, 1840s, and 1850's in part over the issue of the tariff and protection of industry. The Whigs favored higher protective tariffs which won the elections of 1840 and 1848 respectively. The pre-eminent economist in the United States at this time Henry Charles Carey became the leading proponent of the "American System" of economics; it had developed in opposition to the 'free trade' system which Carey called the "British System" as was proposed by Adam Smith and advocated by the British Empire. Careys book "Harmony of Interests" together with German-American economist Friedrich List in his scholarly work became widely read and disseminated in America and Germany leading the German Historic School economists to embrace a similar anti-free trade approach which was embraced by Chancellor Bismarck in the late 1800s.
The fledgling Republican Party led by Abraham Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade and when formed the party implemented a 44 percent tariff during the Civil War in part to pay for the building of the Union-Pacific Railroad, the war effort, and to protect American industry. President William McKinley stated the United States' stance under the Republican Party (who had won every election for President except the two non-consecutive terms of Grover Cleveland until 1912 maintaining Lincoln's economic principles) as thus:
The tariff and support of protection to support the growth of infrastructure and industrialization of the nation became a leading tenet of the Republican Party thereafter until the Eisenhower administration and the onset of the Cold War.
In the 1930s, the US adopted the protectionist Hawley-Smoot Tariff Act which raised rates to all-time highs beyond the Lincoln levels, which some economists believe exacerbated the Great Depression. In response the Democratic Party under Franklin D. Roosevelt resorted to Hamilton's earlier formula of Reciprocity with moderate tariffs coupled with subsidy to industry which went unbroken until the 1970s when the Free Trade era began for the United States after the Kennedy Round of trade talks in the late sixties were complete.
Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, drugs, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.
Protectionists fault the free trade model as being reverse protectionism in disguise, that of using tax policy to protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreign products, government must fully rely on domestic taxation to provide its revenue, which falls heavily disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "[Foreign discrimination of US products] is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries.
Some proponents of protectionism claim that imposing tariffs that help protect newly founded infant industries allows those domestic industries to grow and become self sufficient within the international economy once they reach a reasonable size.
Economists, such as Milton Friedman and Paul Krugman, have argued that free trade helps third world workers, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing — and of the penumbra of other jobs that the new export sector creates — has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions. It has even been suggested that those who support protectionism ostensibly to further the interests of third world workers are being disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the third world only accept jobs if they are the best on offer, as all mutually consensual exchanges benefit both sides. That they accept low-paying jobs from western companies shows that the jobs they would have had otherwise are even worse.
Alan Greenspan, former chair of the American Federal Reserve, has criticised protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer.
Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantalist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding World War 1 and 2. According to Frederic Bastiat, "When goods cannot cross borders, armies will."
Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. This happens because quotas artificially restrict supply, so it is unable to meet demand; as a result the foreign producer can command a premium price for its products. These increased profits are known as quota rents.
For example, in the United States (1981–1994), Japanese automobile companies were held to voluntary export quotas. These quotas limited the supply of Japanese automobiles desired by consumers in the United States (1.68 million, raised to 1.85 million in 1984, and raised again to 2.30 million in 1985), increasing the profit margin on each automobile more than enough (14% or about $1200 in 1983 dollars, about $2300 in 2005 dollars) to cover the reduction in the number of automobiles that they sold, leading to greater overall profits for Japanese automobile manufacturers in the United States export market, and higher prices for consumers. (Berry et al. 1999).