The Economic Cost of Protectionism

The Brexit votes are now tallied. The political atmosphere south of the border leading up to the election shows protectionist policies are gaining traction with the general public. It seems some Western economies may be restricting trade across their borders. In an era of globalization and global trade, this appears at odds with the way the world is (was) moving.

Although these are complex, highly political policies, from an economic point of view protectionist policies have significant drawbacks. Here are a few things protectionist economies are giving up:

1. Consumers – Free trade and open borders expose companies to millions of additional consumers for their products. Canada is a net exporting country. By keeping tariffs low on our exported goods it makes them more attractive to foreign consumers, giving domestic companies access to more consumers, higher sales, and growth potential.
2. Competition – The general increase in competition from foreign companies competing with domestic companies leads to competing price and value propositions. Consumers benefit from lower prices or higher service value on comparable products. The competition also forces companies to be more efficient and innovative, which leads to greater output from society.
3. Variety – Access to foreign products leads to a greater variety of imported and domestic products and services available to consumers. This increase in choices of products and options grants consumers greater flexibility within their personal budgets and spending habits.

Open borders generally benefit employment. A special report from BMO Capital Markets shows unemployment in Canada fell from 10.4% to 6.9% under NAFTA from 1994 to 2015. Undoubtedly some sectors are hurt by free trade, but overall employment rises. It causes countries to specialize in a skill set and focus on what they excel at.

So whether the protectionist policies are between countries or within a country and between provinces, there is an economic cost to protectionism that should not be overlooked by policymakers.