Research continues to shows that trade protectionism is merely self-harm policy

Businesses can sometimes undertake dishonest actions to undermine their competition in the market. This may include, among other things, flooding the market with goods in order to initiate a downward price shock. Some businesses may lower prices excessively in order to make other companies unprofitable and drive them out of the market.

To counter these practices,  countries usually enact policies that in some way or another protect domestic industry from  “unfair” competition from foreign industries. These policies — known as protectionism — include tariffs, subsidies, quotas, currency manipulation as well as temporary trade barriers like antidumping duties.

While well intended, however, protectionism has no apparent positive effects. In fact, evidence continues to show that while protecting a small sector of the domestic economy, protectionism hurts consumers by reducing supply, increasing prices, and restricting production or innovation. 

Covid-19 and protectionism

Quite recently, due to the supply chain disruptions by the COVID-19 pandemic, some legislators have proposed trade policies to encourage companies to buy their inputs and produce goods in the country. Politicians contend that apart from insuring the country against shortages in the future, buying American would also help bolster jobs and strengthen the economy.

Evidence from prior to the pandemic, however, says otherwise. 

In 2018, for instance, the Trump Administration imposed tariffs on China. A study from an NBER working paper found that, much like previous studies, which showed that Americans bore the costs of the tariffs, Americans continue to bear the costs of tariffs placed on Chinese goods. Contrary to the expectation of lower foreign prices, recent US tariffs have been passed on to importers and consumers almost entirely. 

An even more recent study found that trade barriers, even though they positively affected the industry being protected, have negative consequences for downstream industries — “the producers that use protected goods as intermediate inputs”. According to the study,

First, protectionism has small and short-lived beneficial effects on industry employment. .

Second, protectionism has negative, persistent, and statistically-significant effects on employment in downstream industries.

Third, the downstream employment loss is accompanied by a statistically significant increase in both intermediate-input and final producer prices.

In short, contrary to claims by politicians, trade protectionism is always merely a self-harm policy.