Protectionism results in distortions of the free market mechanism.
Protectionism can be defined as any act made by a nation that prevents the free flow of goods across international borders. It can come in many forms. These include import tariffs, import quotas, subsidization of domestic companies, unnecessarily severe regulations on standards, bureaucratic and licensing barriers and informal bottlenecks. Another form of protectionism occurs when a government keeps the value of its currency artificially below the market-driven exchange rate.
Economics
Economics is a relatively new subject because it studies the best means of allocating scarce resources when people have choices. Societies where people could exercise economic choices in how they worked and how they spent evolved alongside industrialization and development from about the seventeenth century. One of the first and perhaps most famous economist, Adam Smith, proclaimed in 1776 in his book "The Wealth of Nations" that, "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."
Consumers
Economics tell how markets can most efficiently allocate resources so consumers can obtain their maximum utility -- satisfaction. In order for consumers to obtain their maximum utility, there must be optimal competition among firms to provide goods and services at the lowest possible price, in terms of value and quality. Any form of protectionism means that consumers pay higher prices than they would if there was competition. Therefore, economics will define any form of protectionism as bad for consumers.
Developing Economies
Although economics will define any form of protectionism as bad for consumers, there is one circumstance when it may be considered acceptable for a period of time. This is when a country is going through its developmental stage and "catching up" with other nations. Almost all developed countries have used protectionism in the past because economically advanced nations have an overwhelming advantage in producing goods and services, so the less developed country cannot make progress without protecting its fledgling industries and services. The citizens of that country will pay more during the period of protection, but, in the long run, they will benefit from higher living standards.
Exchange Rate Protectionism
In recent times, accusations and counter accusations have become common, concerning the maintenance of artificially low exchange rates. The reason is that when a country makes the value of its currency lower than the natural market rates, its exports will be cheaper. This is done by repeatedly selling large amounts of its currency to lower the demand for it, thus reducing its price. However, this also affects consumers. Those who live in a country that maintains an artificially low exchange rate will gain no price benefit from lower export prices and will pay more for imported goods. Furthermore, whether this practice spreads in retaliatory ways or not, it cannot continue indefinitely. This is because supplies of real money are finite.
