Why do protectionists favor tariffs and quotas

Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. World Economy Trade Policy. Table of Contents Expand. Table of Contents. Definition and Examples of Trade Protectionism. How Trade Protectionism Works. Advantages and Disadvantages.

By Kimberly Amadeo. Learn about our editorial policies. Reviewed by Thomas J. Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.

Learn about our Financial Review Board. Scientific tariffs are import tariffs imposed on an item-by-item basis, raising the price of goods for the importer and passing on higher prices to the end buyer. Peril point import tariffs are focused on a specific industry. These tariffs involve the calculation of levels at which import tariff decreases or increases would cause significant harm to an industry overall, potentially leading to the jeopardy of closure due to an inability to compete.

Retaliatory tariffs are tariffs enacted primarily as a response to excessive duties being charged by trading partners. Import quotas are non-tariff barriers that are put in place to limit the number of products that can be imported over a set period of time.

The purpose of quotas is to limit the supply of specified products provided by an exporter to an importer. This is typically a less drastic action that has a marginal effect on prices and leads to higher demand for domestic businesses to cover the shortfall. Quotas may also be put in place to prevent dumping , which occurs when foreign producers export products at prices lower than production costs.

An embargo , in which the importation of designated products is completely prohibited, is the most severe type of quota. Product safety and high volumes of low-quality products or materials are typically top concerns when enacting product standards.

Some countries may have lower regulatory standards in the areas of food preparation, intellectual property enforcement, or materials production. This can lead to a product standard requirement or a blockage of certain imports due to regulatory enforcement. Overall, restricting imports through the implementation of product standards can often lead to a higher volume of product production domestically.

For one example, consider French cheeses made with raw instead of pasteurized milk, which must be aged at least 60 days prior to being imported to the U. Because the process for producing many French kinds of cheese often involves aging of 50 days or fewer, some of the most popular French cheeses are banned from the U. Government subsidies can come in various forms. Generally, they may be direct or indirect.

Direct subsidies provide businesses with cash payments. Indirect subsidies come in the form of special savings such as interest-free loans and tax breaks. When exploring subsidies, government officials may choose to provide direct or indirect subsidies in the areas of production, employment, tax, property, and more. This can also be a threat in infant industries, where larger and more established players can push out smaller players via undercutting prices, absorbing losses until the competition goes bankrupt.

Offsetting this threat has been an ongoing struggle, with the emergence of international trade agreements and organizations like the World Trade Organization WTO playing an increasingly large role. One of the struggles with international trade is the difficulty of enforcement between nations, and the WTO plays a critical role in identifying malpractice and addressing it.

Another critical risk in the global market is intellectual property IP protection. Patents, in a domestic system, protect the innovator to allow them to generate returns on the substantial time investment required to invent or innovate new products or technologies. On a global scale, however, it is quite common for developing nations to copy new technologies via reverse engineering.

This results in copycats violating the patents in an environment where the infrastructure domestically will probably not take legal action. This reduces the desire for innovation and places large economic risks on countries dependent upon this for growth. This is addressed through international patent laws and trade agreements as well, alongside political pressures such as raising tariffs and placing import quotas on countries suspected to be in violation of patents.

The downside to this is that utilizing these measures creates political unrest, global factions, and strained business relationships. Another unfair competition threat is the emergence of global monopolies.

Some of the larger ones attain enough global power and geographic diversification to be difficult to break up via domestic antitrust laws. Economic Losses in a Monopoly : This chart highlights the very real risk of lost economic value in a monopolistic situation deadweight loss in yellow. On a global scale it is even more difficult to regulate, as the size and scale of these companies often extends beyond the power of the governments where these companies are located.

This is addressed through international standards and trade agreements, standardizing governmental policy on a global level to reduce the risk of monopoly and unfair consolidation towards market dominance. Many policy makers who are proponents of trade protectionism argue that limiting imports will create or save more jobs at home. Many policy makers who are proponents of trade protectionism make the argument that limiting imports will create more jobs at home. This argument is predicated on the idea that buying more domestically will drive up national production, and that this increased production will in turn result in a healthier domestic job market.

Domestic industries will not have to compete with foreign producers, and are therefore protected from losing marketshare to cheaper imports. It is useful to consider the concept of a trade balance, or net exports, in the context of the jobs argument. The U. In the U. The disastrous economic collapse via the clear-cut abuses by the banks, and the resulting drop in employment rates, has created an incredibly tangible social and political agenda to bring production back to domestic jobs from overseas.

This sentiment towards protectionism is a direct result of the jobs argument in view of an imbalanced trade ratio, where more exports production and jobs at home are required to sustain the ongoing consumption of imports. Along similar lines, it is common practice for companies to identify strategic alliances abroad and send much of the production work to these locations. This is often a result of cheaper labor and easier systems of governance in those regions.

The obvious perspective, from a policy making context, is that these are jobs lost to overseas competitors.

This idea of limiting outsourcing in light of the protectionist jobs argument has resulted in governmental subsidies that work to offset the costs of manufacturing domestically in the U.

These subsidies are essentially grants or tax breaks for companies operating domestically and creating jobs, driving up employment rates via protectionist strategies. Offsetting the threats of outsourcing and trade imbalances and driving domestic purchasing, and thus domestic production, is done through a variety of political vehicles. Most notable among them are:.

International trade agreements are agreements across national borders that reduce or eliminate trade barriers to promote economic exchange. International trade agreements are trade agreements across national borders intended to reduce or eliminate trade barriers to promote economic exchange. International trade encounters a variety of obstacles, some of which pertain to the protectionism identified in other atoms, which reduce trade incentives.

This is usually through tariffs, quotas, taxes, and other trade restrictions. It is also useful to create standards and norms across different countries, particularly for things like intellectual property law recognition, which enables businesses to operate across borders. There are quite a few international trade agreements, some of which are more formal than others. The trade agreements below provide a fairly comprehensive overview of the current international trade environment:.

Domestic firms may also be hurt financially since they may have to purchase parts to make their products and then pass the increased cost on to the consumer. Overall, global competition is a key factor in keeping the price of numerous goods and products down and give consumers the ability to spend.

Infant industries may never grow up due to government trade protection policies. The key questions are: When will an infant industry no longer need protection from its home government?

When will it be regarded as a mature company that has a comparative advantage against foreign companies and in overseas markets? A nation can use the policy of protecting its infant industry, but for how long is a key concern.

The protection of an infant industry may actually end up costing a government significant amount of money and financial resources in order to protect its infant industry. This may actually promote inefficiencies by the infant industry and have no incentive to make efficient, intelligent, long-term investments by borrowing funds or issuing common stock from the domestic international capital markets.

This type of protectionism may hinder the growing pains and maturation process that are vital for an infant industry to experience in the short and long-term if it is to be successful and competitive in global markets and eventually have a comparative advantage. Exchange rate controls that causes long-term inflation since the domestic nation has kept the value of its currency low. By having its currency decrease in value so that it can sell its products and goods at cheaper prices in foreign markets, any foreign products sold in its market will actually see prices increase.

Consumers will be forced to pay higher prices for goods, products, and commodities they need to survive. The problem is that a nation may have a good intention of helping its industries be competitive abroad while its citizens pay higher prices at home. A trade war among nations. A serious problem with trade protectionism is that nations will take reciprocal action if there are trade protection policies put into effect.

The problem here is that nations will retaliate if they cannot sell their goods and products in markets where they normally could. For example, the United States and Japan, long-time allies, both politically and militarily since the end of World War II, have invoked tariffs and administrative trade policies against each other. This has ended up costing the consumers of the respective countries billions of dollars in increased costs and limited consumer choices.

A trade war will ultimately mean increased import costs as manufacturers and producers must pay more for equipment, commodities, and intermediate products from foreign markets. According to a study by the International Monetary Fund IMF , a permanent 10 percent increase in American tariffs on imports from all parts of the globe will result in a permanent 1 percent decrease in real GDP.

The most famous trade war reprisal that occurred in the history of the United States was the Smoot-Hawley Act in June of Here, President Herbert Hoover signed a tariff bill that raised taxes on many agricultural products and goods causing retaliation by other nations.

While the act was intended to protect American companies and industries, it increased tariffs by an average of 20 percent on more than 20, imported products and goods. This ultimately caused global trade to drop by 67 percent and American exports to fall as much as 75 percent.

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, investments, and financial statement analysis.