Protectionist policies

Protectionist policies involve government policy to favour domestic industry and reduce the influence and competitiveness of foreign imports. Protectionist policies include

  • Tariffs on imports – making import goods more expensive.
  • Quotas – limits on the quantity of imports, e.g. voluntary export restraints on import of Japanese cars
  • Domestic subsidies – This gives domestic industries a relative advantage compared to competitors who do not get the same government intervention.
  • Non-tariff barriers – Particular environmental regulations, which make imports unsuitable for being sold in that country.
  • Currency manipulation. If a country keeps the currency undervalued, exports will become relatively more competitive.

Examples of protectionist policies in EU / US

The EU and US do pursue some protectionist policies, especially in areas like agriculture. Both the EU and US subsidise elements of their agriculture sector. This involves:

  • Tariffs on imports from outside the EU. This makes imports of agricultural products more expensive helping domestic farmers.
  • Domestic subsidies to farmers. This can take the form of minimum target prices. This gives farmers a guaranteed income and make imports relatively uncompetitive.
  • Examples of protectionism

Devaluation as protectionism

If you wanted to devalue your currency, you could sell it. Buying large quantities of a currency would lead to an appreciation in its value.

The main OECD economies (in EU and US) don’t directly target their currency through interventionist buying and selling. You could argue they indirectly effect their currency through  monetary policy. For example, if a country like US pursues quantitative easing – increasing money supply and reducing long term interest rates, this will tend to make the currency less attractive leading to a depreciation in its value. The UK’s monetary policy after the recession certainly led to a sharp fall in its value. The MPC don’t specifically target the currency, however in the aftermath of the recession, a fall in the value of currency helped boost exports and domestic demand so they didn’t really mind. As a side effect, the depreciation did create inflationary pressures (higher import prices) we are seeing today.

China has sought to target its exchange rate. They have sought to keep the currency undervalued by using its foreign exchange reserves to buy foreign assets such as dollar securities. See: Chinese Currency manipulation

Many argue that this currency manipulation is a form of unfair trade protection policy. By reducing the value of their currency, China help to make their exports more competitive at the expense of the EU and US producers.

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One thought on “Protectionist policies

  1. I’m wondering: you said Greece is in trouble because it cannot devalue its currency, since it’s the euro shared with other countries. However, doesn’t increasing import tariffs have the same effect?

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