Protectionism is a government policy that provides economic protection of domestic entities from foreign competition by either imposing tariffs or quotas on imports or by other restrictions and subsidies to domestic industries Protectionism is often used as a way to reduce the strain of international competition for domestic manufacturers, services, and other industries. While it can have both positive and negative repercussions depending on the specific situation, protectionism can be a way to guard against the displacement of domestic jobs or a way to promote domestic economic growth and development.
1. Using Tariffs: The most common form of protectionism is the use of tariffs, which are taxes imposed on imported goods coming into the domestic market. Tariffs provide a financial disincentive to purchasing imports and can be used to generate income for the government while still providing protection to domestic industries. The United States has used tariffs to protect its steel industry, which faced significant competition from China.
2. Subsidies: Government subsidies are another form of protectionism and involve the government providing financial assistance to domestic industries in order to provide them an advantage over foreign competitors. This can take the form of direct payments to industries, tax breaks, or even loans and guarantees for private businesses. The U.S. has used subsidies to protect its agricultural industry, with the government distributing more than $25 billion in subsidies to farmers in 2020.
3. Quotas: Quotas are restrictions on the number of imports that can be imported into a country in order to protect domestic producers from outside competition. They are often used in combination with tariffs to further protect domestic industries. For example, the European Union has imposed quotas on the importation of steel from China in order to protect the EU's steel industry.
4. Localization Requirements: Localization requirements, also known as local content rules, are another form of protectionism that requires certain products to be sourced locally. This can range from a certain percentage of a product to all of a product needing to be sourced from domestic suppliers. India has been using local content rules to promote the development of its solar energy industry by requiring solar panel manufacturers to source 30% of their materials from local sources.
5. Non-Tariff Barriers to Trade (NTBs): Non-tariff barriers to trade (NTBs) are government-imposed barriers that are not related to tariffs and can also be used to protect domestic producers. These include activities such as health and safety inspections, environmental standards, taxation, and other restrictions that are intended to make it more difficult to import goods and services. The U.S. has used NTBs in the form of sanctions on certain countries, such as those imposed on Russia, in order to protect its domestic industries.