Protectionism
This article is part of the Basic Liberalism Course -> Module 7: Distortions of the Free Market
Last updated: 2026-06-03
Protectionism
Protectionism consists of imposing restrictions on international trade, such as tariffs, quotas or non-tariff barriers, with the aim of protecting national industry from foreign competition. Protectionists say that these measures are necessary to protect jobs, boost national industry and reduce the trade deficit.
Examples:
- Tariffs: Taxes on imported products that artificially make them more expensive.
- Import quotas: Limits on the quantity of certain goods that can be imported.
- Subsidies: Financial aid to national industries to compete against foreign products.
Politicians often combine these measures, worsening the situation.
Apparent benefit:
- Protectionism seems beneficial because it protects jobs in local industries that compete with foreign products.
- In this sense, the employees of the protected companies
Hidden cost:
- Protectionist policies ignore the impact on consumers, who end up paying higher prices for imported or local goods.
- In addition, industries that depend on imported inputs face higher costs, which can reduce their competitiveness.
- Lower competitiveness = Lower employment = More poverty.
Loss of opportunities:
- Protectionism limits access to cheaper or better quality goods and services from abroad.
- It also reduces the opportunities for national industries to benefit from the specialization and comparative advantages offered by international trade.
Misallocation of resources:
- Protectionist policies divert resources towards less competitive industries, instead of allowing these resources to be allocated efficiently according to market signals.
- This prevents the economy from reaching its maximum potential for productivity and growth.
Protectionism perpetuates inefficiency:
- By protecting local companies from foreign competition, protectionism discourages innovation, process improvement and cost reduction.
- This ends up harming the very industries it seeks to protect.
- Every time a consumer pays more for some type of protectionism, they are poorer, because that extra money they paid could have been used on other goods and services, this particularly affects the poorest.
International retaliation:
- Trade barriers can provoke retaliation from other countries, which reduces national exports and negatively affects local industries that depend on foreign trade.
Examples
Example 1
- Suppose the import of tires has a very low quota, that is, practically no tires can be imported from abroad.
- This allows local tire manufacturers to set practically any price they want for tires since they cannot be obtained otherwise in the country.
Benefited
- The entrepreneurs and employees of those companies.
Harmed
- In this example, it is all consumers in the country, including local companies. Since tires are expensive, transportation costs are also higher, generating a higher price in all goods and services in that country.
- By protecting some companies, the entire country is harmed.
- Many times the way to escape this is the black market (more expensive), or leaving the country with the vehicle and buying in a neighboring country.
- Other times the tires sold are of lower quality, and they try to extend their useful life, all at a higher price than one could buy a new one of better quality if importation were allowed.
Example 2
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Suppose there are tariffs on washing machines. These tariffs protect the local washing machine companies that are technologically backward compared to other countries to survive.
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Local washing machines have lower quality and higher price, and above all, the entrepreneurs who manufacture washing machines locally have no interest in improving the technology since that industry is protected and they do not need to compete against any other company.
Result
- Consumers (the whole country) either pay a good washing machine more expensively or stay with the local one from the country of lower quality.
This article is part of the Basic Liberalism Course -> Module 7: Distortions of the Free Market
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Last updated: 2026-06-03
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