Question

Why do nations adopt trade restrictions? What impact do trade restrictions have on the economy? Do trade restrictions create jobs?

Answer 1

There are various reasons, some are political and some are economic. Domestic producers lobby the government to impose trade barriers in certain industries where they are hurt by foreign trade/imports in terms of reduced sales. There are arguments such as domestic industries are infant and cannot face foreign competition, national security is lost with foreign trade, massive unemployment when foreign trade engulfs domestic producers, etc.

Trade restrictions increase the price of the imported products, reduce their quantity consumed, and so reduce the overall economic welfare of the economy, if it is relatively smaller. Consumer surplus is reduced, producer surplus is increased, and there is a welfare loss in terms of reduced trade surplus.

In some cases, trade restrictions can create few jobs. When domestic producers face stiff competition from foreign producers and they lose their sales, they start producing less and fire workers. By restricting trade, these industries prevent the losses. However, it is also observed that trade restrictions mainly reshuffle the jobs from industries where there are no import protections to industries there are trade restrictions, so overall job creation is meager.