Trade Protectionism Methods With Examples, Pros, and Cons

How Protectionism Affects the Economy

An infographic of Trade Protectionism with an image of a cargo ship with an American flag and the headline “Trade Protectionism and Its Methods” and four separate methods described. “1. Smoot-Hawley Tariff of 1930. It was designed to protect from agricultural imports from Europe. 2. When the government subsidizes local industries, That allows producers to lower the price of local goods and services. 3. Impose quotas on imported goods. No matter how low a foreign country sets the price through subsidies, it can’t ship more goods. 4. Deliberate attempt by a country to lower its currency value. This would make its exports cheaper and more competitive.”

The Balance



Four Protectionist Policies


The chart below shows the share of tariffs collected on U.S. imports since 1790. Tariffs hit a record 57.3% in 1830 due to the Tariff of Abominations.﻿﻿﻿ They hit a record low in 2008 at 1.2%.﻿﻿﻿


The Use of Subsidies

Governments also frequently subsidize local industries to help them compete in the global market. Subsidies come in the form of tax credits or direct payments. The most commonly used are farm subsidies. That allows producers to lower the price of local goods and services. This support makes the products cheaper, even when shipped overseas. Subsidies work even better than tariffs. This method works best for countries that rely mainly on exports.

But sometimes subsidies can have the opposite effect. The Agricultural Adjustment Act of 1933 allowed the government to pay farmers not to grow crops or livestock. The government wanted to control supply and increase prices. Farmers could also let their fields rest and regain nutrients due to overproduction. It helped the agriculture industry but raised food costs during the Depression.

Using Import Quotas and Currency Manipulation





Protectionism also temporarily creates jobs for domestic workers. The protection of tariffs, quotas, or subsidies allows domestic companies to hire locally. This benefit ends once other countries retaliate by erecting protectionism.


In the long term, trade protectionism weakens the industry. Without competition, companies within the industry do not need to innovate. Eventually, the domestic product will decline in quality and be more expensive than what foreign competitors produce.

Job outsourcing is a result of declining U.S. competitiveness. Competition has declined from decades of the United States not investing in education. This failure is particularly true for high-tech, engineering, and science. Increased trade opens new markets for businesses to sell their products. The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by $500 billion.﻿﻿﻿

Increasing U.S. protectionism will further slow economic growth. It would cause more layoffs, not fewer. If the United States closes its borders, other countries will do the same. These actions could cause layoffs among the 12 million U.S. workers who owe their jobs to exports.


Since the Smoot-Hawley Act, most countries have been anti-protectionist. They realize protectionism lowers international trade for everyone. One of the strongest tools in anti-protectionism is the free trade agreement (FTA). It reduces or eliminates tariffs and quotas between trading partners. The largest agreement is the United States-Mexico-Canada Agreement (USMCA, formerly NAFTA). The Trans-Pacific Partnership would have been even larger, but President Trump withdrew the United States from that agreement. As a result, the other involved countries have formed their own accord. If China decides to join them, it will replace NAFTA as the world's largest trade pact.

Also, in the running for the world's largest trade agreement would have been the Transatlantic Trade and Investment Partnership, a deal that was discussed between the European Union and the United States under President Obama. But the Trump administration did not pursue it. Another large multilateral trade pact is the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), between the United States and Central America.


But FTAs don't eliminate protectionist measures such as subsidies or currency wars. One of the disadvantages of NAFTA was that subsidized U.S. farm products put Mexican farmers out of business. However, despite their disadvantages, for some countries and industries, free trade agreements have more pros than cons. 

The Bottom Line

In a global economy, protectionism is damaging to everyone. Trump’s “America First” economic policy could hurt the U.S. economy in the long run, and it remains to be seen what the Biden administration will do. Tariff imposition on imports from China, Canada, the EU, Mexico, and India have triggered retaliatory tariffs. A trade war with these large economies leads to serious consequences for U.S. exporters and the labor force.


Free trade agreements could advance the world economy. Although unfavorable to uncompetitive domestic industries, these boost local industries that can produce at better economies of scale than those of other nations.