Definition: Protectionism is the trade measures or economic policy imposed by countries’ governments to protect their domestic businesses and industries from foreign competition.
What Does Protectionism Mean?
What is the definition of protectionism? Protectionism includes government policies that restrict free trade between particular countries, seeking to protect the local industries and jobs from unfair foreign competition. The most common types of protectionism measures are tariffs, import quotas, and subsidies to local producers.
As a result of protectionism, local businesses become more competitive, and unemployment rate decreases in the short-term as more jobs are created for the domestic workers. However, in the long-term, protectionism secludes a country by restricting imports, thus becoming less competitive in international trade.
Let’s look at an example.
Example
A typical example of protectionism is the Common Agricultural Policy (CAP) of the European Union. The European Union imposes significant tariff rates on a range of agricultural markets, seeking to protect the European farmers from imported agricultural goods.
The EU CAP policy influences food prices by initially affecting the producer prices. Producers have to impose a higher price, thereby increasing consumer prices and discouraging consumption. The EU subsidizes the European farmers so that they produce more output and become competitive with their foreign peers. The subsidies increase consumption because producers can charge more competitive prices. At this stage, the size of the market is an important factor.
The EU market is more than 500 million potential consumers, so the market power can influence the distribution of the margin that producers want to impose on their products. This explains the worries of some people about the Brexit. The EU market will become smaller by 60 million potential consumers, and the product margins will have to adjust accordingly.
Nevertheless, the receptiveness of consumers also depends on the price elasticity of demand for the agricultural products of the European farmers, which varies across different income groups. In the end, the level of consumption depends on all the previous factors but also on the health implications that may exist in less nutritious products.
Summary Definition
Define Protectionism: Protectionism means a trade policy designed to insulate and protect domestic businesses from world-wide competition.
