- Vellore Institute of

Technology, School of Law, Chennai

- BA LL. B (Hons.)

- LAW4020

- International Trade Law

- Prof. S. ANANDHA KRISHNA RAJ

Vignesh R – 20BLA1031
Protectionism, a trade policy that aims to shield domestic industries
from foreign competition, has been a subject of debate for centuries.
It involves implementing various measures, such as tariffs, quotas,
subsidies, and non-tariff barriers, to restrict imports and promote
domestic production. While protectionist policies can offer short-
term benefits for certain industries, they often have long-term
consequences for economic growth and consumer welfare.
Historically, protectionism has been used to protect nascent
industries, safeguard strategic sectors, and address balance of
payments issues. However, the rise of globalization and free trade
has challenged the rationale for protectionist measures. Proponents
of protectionism often argue that it can create jobs, boost domestic
production, and reduce dependence on foreign goods. They may
also point to the need to protect strategic industries, such as defense
or agriculture, from foreign competition.

However, critics of protectionism contend that it can lead to higher

prices for consumers, reduced economic efficiency, and retaliation
from other countries. By limiting competition, protectionism can stifle
innovation and reduce the quality of goods and services. Moreover,
it can distort trade patterns and lead to trade wars, harming global
economic growth. In recent decades, there has been a growing trend
towards free trade and open markets. International organizations
like the World Trade Organization (WTO) have played a crucial role
in promoting free trade and reducing trade barriers. However,
protectionist sentiments have re-emerged in some countries,
particularly in response to globalization and economic downturns.

The debate over protectionism versus free trade continues to shape

global economic policies. While protectionist measures may offer
short-term benefits, their long-term implications for economic
growth, innovation, and consumer welfare are complex and
multifaceted.
Tariffs are among the most prominent tools of protectionism, levied
on imports to raise their prices within the domestic market. By
increasing the cost of imported goods, tariffs discourage their
consumption, making domestic alternatives more attractive. There
are three primary types of import tariffs: scientific tariffs, peril point
tariffs, and retaliatory tariffs.

Scientific tariffs are item-specific levies applied to adjust the price of

imported goods to reflect local production costs. For instance, if an
imported product's price significantly undercuts that of a locally
produced equivalent, a scientific tariff can equalize the playing field,
ensuring the domestic industry remains viable. These tariffs are
precise and tailored to individual products, passing the increased
costs to consumers.

Retaliatory tariffs, on the other hand, are political and diplomatic

tools, enacted as countermeasures to excessive duties imposed by
trading partners. They are not primarily designed for economic
protection but to pressure foreign governments into fairer trade
practices. A notable example is the U.S.–China trade war, where both
countries imposed reciprocal tariffs to protect domestic interests
and negotiate better terms.

Import quotas are non-tariff barriers that limit the quantity or value
of specific goods that can be imported within a certain period. Unlike
tariffs, which raise the cost of imports, quotas directly cap the supply,
often creating a domestic shortfall that boosts demand for local
products. For example, if a country imposes a quota on textile
imports, domestic textile manufacturers gain an opportunity to fill
the gap.

Quotas are also employed to address practices like dumping, where

foreign producers export goods below production costs, undermining
local businesses. By restricting the volume of dumped goods, quotas
stabilize domestic markets and prevent predatory pricing.

An extreme form of quota is the embargo, a complete prohibition on

importing specific products. Embargoes are usually enacted for
political or health reasons, such as banning imports from a country
accused of unethical practices or halting products deemed unsafe.
While effective, embargoes often strain international relations and
lead to retaliatory measures.

Product standards are regulatory barriers that restrict imports

based on quality, safety, or production methodologies. These
standards ensure that foreign products meet domestic
specifications, often favoring local producers who already comply
with such regulations. While ostensibly enacted to protect
consumers, product standards frequently serve as covert
protectionist measures.

For instance, stringent health regulations can block products that fail
to meet domestic standards. A notable example involves French
cheeses made from raw milk. The United States requires these
cheeses to be aged for at least 60 days before importation, while
many French varieties are traditionally aged for shorter periods. As
a result, popular French cheeses are effectively barred, giving
American cheese producers a competitive edge.

Similarly, product standards can address concerns over intellectual

property, environmental sustainability, or labor practices. By
enforcing high standards in these areas, countries protect local
industries from competition with foreign producers operating under
less stringent regulations. For example, a country might ban imports
of goods produced in factories with poor labor conditions,
simultaneously promoting ethical practices and shielding its
industries from underpriced competition.

Subsidies are financial aids provided by governments to support

domestic industries, helping them compete against foreign rivals.
These subsidies can be direct—such as cash grants—or indirect, like
tax breaks or interest-free loans. Subsidies encourage production,
employment, and investment, ensuring domestic businesses remain
competitive even in global markets.

In trade contexts, subsidies often focus on exports. Export subsidies

incentivize domestic companies to expand their international reach
by offsetting production costs and reducing export prices. For
example, a government may subsidize agricultural producers to sell
their goods overseas at competitive rates, increasing market share
for domestic exports.

Production subsidies, another form of support, ensure local

industries remain viable despite challenges like high labor costs or
raw material expenses. For instance, countries with high minimum
wages may subsidize manufacturing industries to maintain domestic
production.

While subsidies benefit domestic industries, they can distort global

trade, drawing criticism from international organizations like the
World Trade Organization (WTO). Developed nations, in particular,
have faced backlash for their extensive use of subsidies, which often
disadvantage developing countries lacking similar resources.
1. Early Modern Period: Mercantilism Dominates Trade (17th & 18th
Centuries)

In the 17th and 18th centuries, European monarchies favoured

mercantilism, an economic doctrine aimed at maximizing national
wealth through trade surpluses. This approach encouraged the
accumulation of precious metals and sought to limit imports while
promoting exports. To achieve these goals, nations implemented high
tariffs, trade monopolies, and strict colonial trade policies.

2. Industrial Revolution and the Shift Towards Free Trade

The advent of the Industrial Revolution brought significant economic

changes. Britain, which emerged as the world’s first industrialized
nation, initially embraced protectionism to support its nascent
industries. However, as it achieved industrial preeminence, the
economic benefits of free trade became more apparent.

This shift culminated in the repeal of the Corn Laws in 1846, a

landmark event signaling Britain’s move away from protectionism.
These laws, which had imposed high tariffs on imported grain, were
repealed under pressure from industrialists and urban consumers
seeking cheaper food. By the mid-19th century, Britain had embraced
free trade, becoming a global advocate for open markets.

3. Late 19th Century: Decline of Protectionism Across the West

By 1913, customs duties had been reduced significantly across

Western nations. This period of relative peace and economic
prosperity, often referred to as the first era of globalization, saw the
expansion of international trade and investment. Western
economies, benefiting from technological advancements and
colonial markets, increasingly favored liberal trade policies.
However, this liberalization was not universal. Many developing
nations and colonies remained subject to discriminatory trade
practices, as industrialized nations imposed tariffs and regulations to
maintain economic dominance.

4. World War I: Return to Protectionism

The outbreak of World War I in 1914 marked a turning point. Economic

disruptions caused by the war, including supply chain breakdowns
and resource allocation for military purposes, led many nations to
reintroduce protectionist measures. Tariffs and trade barriers were
reinstated to safeguard domestic industries critical to the war effort.

The post-war recovery was uneven, and global economic

cooperation remained limited. Protectionism persisted as nations
sought to rebuild their economies independently, often at the
expense of international trade.

5. The Great Depression of the 1930s: Heightened Protectionism

The Great Depression, beginning in 1929, dealt a severe blow to global

trade. In response to mass unemployment and declining industrial
output, many nations resorted to aggressive protectionist policies to
shield domestic industries.

The most infamous example was the Smoot-Hawley Tariff Act of 1930
in the United States, which raised tariffs on thousands of imported
goods. While intended to protect American jobs, the act triggered
retaliatory measures from trading partners, further contracting
global trade. By the mid-1930s, international trade had plummeted,
exacerbating the economic crisis.

6. Post-War Era: Establishment of GATT and WTO

The devastation of World War II underscored the need for

international cooperation in trade. In 1947, the General Agreement on
Tariffs and Trade (GATT) was established, marking a shift towards
trade liberalization. GATT aimed to reduce tariffs and eliminate non-
tariff barriers through successive negotiation rounds, fostering
economic recovery and growth.

While GATT promoted freer trade, it did not eliminate protectionism

entirely. Countries retained the right to impose tariffs under certain
conditions, particularly to protect infant industries or address
balance-of-payment issues.

The establishment of the World Trade Organization (WTO) in 1995

expanded the scope of GATT by incorporating services, intellectual
property, and dispute resolution mechanisms. However, even under
the WTO, reciprocal trade agreements have merely limited
protectionist measures rather than eliminating them entirely.

7. Modern Era: Persistence of Protectionism

In recent decades, globalization has reshaped the global economy,

yet protectionism remains a recurring feature. Economic crises, such
as the 2008 Global Financial Crisis, and geopolitical tensions have led
to calls for protecting domestic industries. For example, the U.S.
under the Trump administration imposed tariffs on steel and
aluminium imports, citing national security concerns.

The COVID-19 pandemic further revived protectionist tendencies as

countries prioritized local production of critical goods like medical
supplies and vaccines.

Simultaneously, non-tariff barriers such as subsidies, regulatory

standards, and anti-dumping duties have become common tools for
protectionism, reflecting its evolution beyond traditional tariffs.
Infant industries can grow without facing competition from
established foreign companies. Protectionism also avoids the
challenges of dealing with different legal systems, languages, and
currency exchange rates. Protectionism shields domestic firms from
international market risks, like fluctuating currencies and
transportation challenges.

Protectionism, therefore, is viewed as a way to protect national

interests and economic stability, particularly for countries with
fragile economies or fledgling industries.

Countries need access to goods they cannot produce, and

protectionism limits this. Protectionism reduces overall economic
efficiency and leads to welfare loss. Protectionist policies have
historically led to economic downturns and wars, such as the Great
Depression and World Wars. When one country adopts protectionist
policies, others retaliate, leading to mutual losses and depressed
economies.

Both perspectives highlight real-world consequences of

protectionism. The first section emphasizes its role in stabilizing
domestic economies and nurturing local industries, while the second
warns of the broader economic damage and conflict it can cause.
While protectionism may benefit some sectors in the short term,
economic theory and historical evidence suggest that, in the long
term, free trade fosters greater prosperity and peace.
A large majority of economists believe that free trade benefits
society as a whole. In a 2006 survey, over 87% of American
economists supported eliminating remaining trade barriers, and over
90% opposed restrictions on outsourcing. Economists such as
Gregory Mankiw, Milton Friedman, and Paul Krugman argue that free
trade is essential for promoting economic growth.

Free trade allows countries to specialize in the production of goods

and services where they have a comparative advantage. This
specialization leads to increased efficiency, more job creation, and
higher productivity. Despite concerns about job losses, free trade
tends to create more jobs than it eliminates, particularly in sectors
that benefit from comparative advantage. Additionally, it is argued
that free trade benefits workers in developing countries by
stimulating competition among producers and lifting wages and
living standards.

Developing countries may have industries that are not yet capable
of competing on the global stage. These "infant industries" might
benefit from temporary protectionist measures to give them time to
grow and gain a comparative advantage.
Senile Industry Argument:

Many developing nations rely heavily on producing primary products

like agricultural goods, which face challenges such as price volatility
and low income elasticity of demand. These factors make it harder
for such nations to benefit fully from free trade.
Government Revenue:

Import taxes (tariffs) can be a source of revenue for governments,

and removing them under a free trade regime reduces this income
source. However, tariffs generally raise only a small amount of
revenue compared to other forms of taxation.
Some countries view free trade as a threat to their cultural identity,
fearing the spread of globalization, particularly "Americanization."
Additionally, issues like dumping, where countries sell surplus goods
at very low prices, can harm local industries, particularly in
developing countries.

During their industrialization, many first-world or developed

countries used protectionist policies to build and protect their
domestic industries. For example, in the 19th century, the United
States and several European countries heavily used tariffs, subsidies,
and other protectionist measures to shield their "infant industries"
from foreign competition. This protection allowed their industries to
grow strong before exposing them to global competition.

The U.S. used high tariffs in the 19th century to protect its nascent
industries from competition with Britain’s more advanced
manufacturing sector. Once these industries became competitive,
the U.S. later championed free trade. However, when these
developed nations became economically strong, they began
advocating for free trade, encouraging other nations to open up
their markets while their own industries had already matured.

Today, first-world countries promote free trade through global

organizations like the World Trade Organization (WTO). They argue
that open markets lead to global prosperity by enabling countries to
specialize in industries where they have a comparative advantage.
The problem with this advocacy is that while developed countries
previously used protectionism to grow, they now discourage
developing nations from doing the same. This is seen as unfair
because the same policies that helped developed countries achieve
prosperity are being denied to the Global South, which is still in the
early stages of industrialization.
Developing countries often rely on the export of raw materials or
agricultural products, which have lower value and face price volatility
in global markets. Free trade, in this context, exposes these countries
to unequal competition with highly industrialized nations that
produce higher-value goods and services.

Example: Many African countries export raw commodities like cocoa

and coffee, but developed countries produce and export processed
goods with much higher value, keeping the profits concentrated in
the Global North.

Developing countries’ industries are often weaker and less

competitive compared to those in developed nations. Free trade
forces them into direct competition with well-established
multinational corporations that have significant technological,
financial, and infrastructure advantages. Opening up to free trade
too quickly can lead to the collapse of local industries that are not
yet ready to compete on a global scale. This phenomenon, known as
deindustrialization, leaves developing countries more dependent on
imports, further weakening their economic independence.

Strict food safety and environmental standards in the EU can prevent

agricultural products from developing countries from being exported
there, even though the EU pushes for access to developing nations'
markets. Tariff escalation occurs when developed countries impose
low tariffs on raw materials but higher tariffs on processed goods.
This discourages developing countries from moving up the value
chain and industrializing.

A country that exports raw cocoa may face low tariffs, but if it tries
to export chocolate, it will face much higher tariffs, making it difficult
to compete with established global brands. Free trade agreements
and WTO rules often limit the ability of developing countries to use
policies that foster local industries, such as requiring foreign
companies to transfer technology or hire local workers. This makes
it harder for developing countries to build their own domestic
industries.
Protectionism highlights the hypocrisy of developed nations, which
heavily relied on it during their industrialization yet now discourage
its use by developing countries. Historically, countries like the U.S.
and European powers employed tariffs, quotas, and subsidies to
shield their industries and achieve global economic dominance.
These measures ensured the survival and growth of their infant
industries, securing their place as economic powerhouses.

Today, however, these nations advocate for free trade, largely

through organizations like the WTO, imposing stringent conditions on
developing nations. This shift denies emerging economies the very
tools that enabled Western growth. For instance, while African
nations export raw cocoa at low prices, developed countries profit
immensely by processing it into high-value chocolate. When
developing nations attempt protectionist measures to foster their
industries, they face criticism and punitive trade actions.

Moreover, developed nations maintain agricultural subsidies and

regulatory barriers under the guise of consumer protection,
effectively stifling competition from less developed regions. This
double standard perpetuates economic dependency and inequities.

To achieve a fairer global economy, developing nations must be

allowed the same freedom to employ protectionist policies. Without
addressing this imbalance, international trade remains a tool of
dominance rather than mutual prosperity.