by Dustin Newcombe

Created on: July 22, 2009   Last Updated: July 23, 2009

Protectionism occurs when policymakers undertake actions to protect a certain sector of the domestic economy threatened by international competition. If implemented properly, protectionism provides short term relief for companies in these sectors to recover and improve their operations to more successfully compete with international competition. The goal of implementing protectionist measures is to curb job loss for American workers.

Protectionist measures that policymakers undertake usually involve some form of tariff placed on imports. The cost and/or quality of the foreign goods make them a winner among American consumers resulting in reduced sales for competing American companies. The tariff usually has a net effect of increasing the cost of foreign goods for American consumers to make domestic goods more attractive. If the foreign company doesn't transfer the cost to consumers, the increased cost to export their goods can discourage foreign companies from exporting to America. Sometimes policymakers will subsidize the struggling companies directly; we saw this form of protectionism implemented when Congress provide billions of dollars to the failing auto companies earlier this year. This makes sense in domestic industries dominated by a couple large companies.

Despite good intentions, protectionism can backfire. Often, American consumers are the losers when the Government implements protectionism. When faced with compromises in product availability, cost, or quality, Americans may seek out alternatives or learn to live without these goods altogether. Once Americans abandon ship, it is unlikely to bring them back aboard. This reduces the market for these goods, hurting domestic and foreign producers alike. Retaliation is another negative byproduct of protectionism. The negative impact on sales for foreign companies often leads to retaliatory tariffs placed on American exports. This can severely impact international sales of American goods for companies otherwise unrelated and uncompetitive with the troubled sector. In a worst case scenario, protectionism may result in job losses and consumption squeezes in multiple industries.

Some economic ideologues also argue that protectionism creates inefficiency in the marketplace. From the standpoint of pure textbook capitalism they are right; protectionism gives domestic companies a false advantage. Unfortunately, economies are far more complex than the apples and oranges environments where economic ideologies are conceived. Variables in culture and human motive leave purely ideological economies unattainable in practice. It follows that protectionism is not harmful solely because it interferes in the market. Whether it hurts or helps the economy depends entirely on the successful execution of the protectionist strategy and the soundness of the policymaker's thinking.

In our largely capitalist market, protectionist measures are tools that economic policymakers use to manage a complicated, dynamic and globally interdependent market. Sound, well-executed strategy can help stabilize ailing economic sectors. Knee jerk protectionist strategy can exacerbate the problems in ailing economic sectors, and can expand these problems to unrelated industries.

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