Question

why do governments still bend rules to protect their domestic interests despite evidence that shows that freeing up trade and investment is far more beneficial? Why is government protection of domestic industries 'self-defeating" ?

Answer 1

Government bends rules to favor the domestic interests due to many reasons. The first reason is the populist commitment made to the people and domestic firms during the elections. So, the government favors the bending of rules that can provide the benefits in the short term to the domestic players. For example, not letting companies go for outsourcing and saving jobs, is the case where the government is working on a populist agenda to create more jobs in domestic economy. The second reason is the national security and safety that is more important than the trade gains. For example, a country like India, has never permitted private players to produce power via nuclear method. The third reason is to balance the global political relationships, where different parameters are used for different nations and rules are bent. The next reason is the protection of the infant industry that cannot compete with the foreign established players. So, rules are bent.
The government protection is self-defeating, because it encourages domestic firm to remain inefficient, put higher prices on products and make other industries to be stagnant. It makes domestic economy to suffer and consumers don’t get the best of the alternatives in the market. So, it is said that it is self defeating.