Reasons for protectionism
The reasons for protectionism in international markets are:
Protecting infant industries
Infant industries are industries that are new in that country. Protectionism gives them the opportunity to establish themselves without competition. For example, if a car manufacturing industry were to begin to establish itself in a particular country, protectionist policies would prevent global car companies like Ford from competing in the market.
Protecting local businesses/jobs
This is one of the main reasons for protectionism, which is to protect local businesses and jobs from unfair competition from large businesses (who may be able to charge lower prices due to their size).
Defending strategic industries
Some industries are considered important to the interests of the country, e.g. energy, weapons and defence, agriculture and health. Governments endeavour to protect these industries so that they are not dependent on other countries in the event of a global crisis.
Protection against dumping of goods
Dumping occurs when economies sell goods in foreign markets at a price that is lower than in the home market. These products can out-compete domestic goods as local companies are unable to lower their prices sufficiently to compete.
Avoiding unfair competition
This is a way of protecting local businesses from businesses that can reduce their production costs by taking advantage of lower labour costs in other countries.
Employment protection
By stifling competition, it creates a more conducive environment for domestic businesses to thrive because they do not have too much competition. These businesses in turn employ local people resulting in more money circulating in the local economy, rather than being taken out of the economy by businesses from abroad.
Pause for thought
Look at the graph which shows the price of wheat on the open market in dollars.
You can see the impact of the start of the war in Ukraine on wheat prices.
As a percentage, approximately how much has the price risen from its lowest point to its highest point?
What does this show about the importance of protecting strategic industries such as agriculture?
You can read more about barriers to international business by following this link.