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Why Protectionism is Sometimes Necessary in Trade

Mar 11, 2025

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Consider if your company was suddenly hit with a 25 percent tariff on imports from one of its biggest suppliers. What if that supplier was located in China, and the products were crucial to your operations? You can't just stop using them; that would create severe disruptions in your business. Instead, you would have to figure out how to either absorb the added costs or pass them on to your customers. And that could take time.

This economic interdependence example illustrates how shocks from international trade can impact domestic businesses. Protectionism is sometimes necessary in trade to stabilize the economy. This blog will help you understand why, so you can respond appropriately if your industry faces such an occurrence. GoMoon has an innovative solution to help you prepare for international trade shocks. Our AI-powered economic calendar tracks crucial global trade events and their financial impact to help you know what to expect and when.

What is Protectionism?

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Protectionism is a government trade policy that restricts imports and promotes domestic production. Nations use it to protect local industries, maintain economic stability, and prevent reliance on foreign markets. While free trade encourages open markets and international competition, protectionism limits imports and foreign competition to give local businesses an advantage.

This section provides a detailed breakdown of protectionism, the different protectionist policies, why countries adopt protectionist strategies, and historical examples of how protectionism has shaped global economies. Protectionism refers to government actions designed to shield domestic industries from foreign competition. Countries impose barriers on imports and promote local businesses to ensure economic self-sufficiency and job security.

Key Features of Protectionism

Government intervention in trade to limit imports.
Policies favoring domestic businesses over foreign companies.
Restrictions on foreign investments and economic influence.
Encouragement of local production through subsidies and government incentives.

How Protectionism Differs from Free Trade

Free Trade: Encourages open markets, allowing imports and exports without government restrictions.
Protectionism: Involves government-imposed barriers to reduce foreign competition and strengthen local industries.

Types of Protectionist Policies

Governments use various tools to enforce protectionism, each designed to limit foreign competition and promote domestic industries. The four most common protectionist measures are tariffs, quotas, subsidies, and import bans.

Tariffs (Taxes on Imports)

Definition: A tax on imported goods makes them more expensive for consumers. Purpose: To protect local businesses by making foreign goods less competitive.
Example: In 2018, the U.S. imposed a 25% tariff on Chinese steel imports to protect American steel manufacturers.
Result: U.S. Steel became more competitive, but domestic prices increased for steel industries (e.g., auto manufacturers).

Quotas (Limits on Imported Goods)

Definition: A government-imposed restriction on the number of imported goods allowed into a country.
Purpose: To control the supply of foreign products and boost local production.
Example: The U.S. imposed a quota on sugar imports, limiting the amount that can be imported each year.
Result: Domestic sugar producers benefited, but U.S. consumers paid higher prices for sugar-based products.

Subsidies (Government Financial Support to Domestic Businesses)

Definition: Direct financial aid from the government to local companies to lower production costs and improve competitiveness.
Purpose: To help domestic industries compete against cheaper foreign goods.
Example: China heavily subsidizes its solar panel industry, making Chinese solar panels cheaper than American or European alternatives.
Result: China dominates the global solar panel market, while other countries struggle to compete.

Import Bans and Trade Restrictions

Definition: Complete prohibition of certain foreign goods due to economic, security, or health concerns.
Purpose: To protect local industries, safeguard national security, or control product quality.
Example: The U.S. banned Huawei’s 5G technology due to cybersecurity concerns.
Result: The ban protected U.S. telecommunications firms but limited access to advanced 5G technology.

Other Protectionist Policies

"Buy Local" Laws: Governments require state-funded projects to use locally-made materials.
Currency Manipulation: Some countries devalue their currency to make exports cheaper and imports more expensive.
Border Taxes: Extra taxes on imported goods that compete with domestic products.

Why Some Countries Choose Protectionism Over Free Trade

While free trade encourages global economic growth, some governments favor protectionism to protect domestic jobs, industries, and economic independence. The main reasons why countries adopt protectionist policies include:

To Protect Infant Industries from Foreign Competition

New industries struggle to compete against established global players. Protectionism gives local companies time to grow before facing entire international competition. For example, in the 1960s, South Korea protected its automotive industry from imports. Result: Hyundai and Kia became global brands after years of government support.

To Reduce Dependency on Foreign Countries

Relying too heavily on imports can weaken national security and economic independence. For example, the U.S. relied on China and Taiwan for semiconductors, creating supply chain risks. In response, the U.S. passed the CHIPS Act to boost local semiconductor production.

To Preserve Jobs and Wages for Domestic Workers

Free trade often leads to job outsourcing to countries with cheaper labor costs. Protectionism prevents mass layoffs and keeps wages stable. Example: Many U.S. manufacturing jobs moved to China and Mexico due to more affordable labor. The U.S. imposed tariffs on Chinese goods in 2018 to bring jobs back.

To Ensure National Security in Strategic Industries

Specific industries (defense, energy, healthcare, and technology) must be protected from foreign control. For example, the U.S. banned Chinese telecom giant Huawei from its 5G infrastructure, citing security risks.

To Balance Trade Deficits & Strengthen the Local Economy

Countries with large trade deficits (more imports than exports) lose money to foreign economies. Protectionism reduces deficits by promoting domestic production. For example, the U.S. has a trade deficit with China, leading to tariffs to encourage local production.

Historical Examples of Protectionism in Action

U.S. Tariffs on China (2018-2023)

Why? To protect U.S. industries from cheap Chinese imports.
Impact? Increased costs for American consumers but boosted local production.

Japan’s Auto Industry Protection (1950s-1980s)

Why? To support Toyota, Honda, and Nissan against U.S. and European competition.
Impact? Japan’s automobile industry became a global leader.

Europe’s Agricultural Subsidies (Ongoing)

Why? To protect European farmers from low-cost foreign agricultural imports.
Impact? Higher food prices but a stable farming economy.

The Economic Justifications & Social Benefits of Protectionism

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Economic Justifications for Protectionism

Protectionism is sometimes necessary in trade, especially when considering the economic justifications for its use.

Protecting Domestic Industries from Unfair Competition

Free trade allows foreign companies to sell goods at lower prices, sometimes due to government subsidies or lower labor costs. Domestic industries may struggle to compete with cheaper foreign goods, leading to business closures and job losses. Protectionist policies like tariffs and import quotas help local industries survive and grow by giving them time to improve production efficiency. Example: The U.S. Steel Industry Tariffs (2002) The U.S. government imposed tariffs on foreign steel imports to protect the domestic industry. This policy helped U.S. steel producers modernize and become more competitive, although it also increased steel prices for manufacturers that relied on imports.

Promoting Industrial Development and Economic Growth

Countries with new or developing industries often use protectionism to support local businesses until they can compete globally. This strategy, known as the Infant Industry Argument, suggests that young industries need protection from foreign competition to allow them to grow. Example: South Korea’s Protection of Its Auto Industry (1960s-1990s) The South Korean government restricted foreign car imports while providing subsidies and support to local companies like Hyundai and Kia. This protectionist strategy allowed South Korea to develop a globally competitive automotive industry.

Reducing Dependence on Foreign Countries

Over-reliance on foreign goods can make a country vulnerable to supply chain disruptions and political pressures. Protectionism encourages domestic production, reducing dependence on imports and strengthening economic stability. Example: The U.S. and Semiconductor Manufacturing (2020—Present) The U.S. relies heavily on China and Taiwan for semiconductor chips, essential for electronics, defense, and medical industries. In response, the U.S. passed the CHIPS Act in 2022 to promote domestic semiconductor production and reduce reliance on foreign suppliers.

Preventing Over-Specialization and Market Shocks

Free trade encourages countries to specialize in producing a few goods, but this can be risky if demand declines. Protectionism helps maintain a diversified economy, reducing the impact of global market fluctuations. Example: The Decline of the U.K. Textile Industry (20th Century) The U.K. textile industry declined as cheaper imports from Asia flooded the market. Without protectionist policies, many textile factories closed, leading to mass job losses and economic decline in textile-producing regions.

Balancing Trade Deficits

A trade deficit occurs when a country imports more than it exports, leading to money flowing out of the economy. Protectionist policies can reduce trade deficits by encouraging domestic production and the consumption of locally made goods. Example: The U.S.-China Trade War (2018- Present) The U.S. imposed tariffs on Chinese goods to reduce its trade deficit with China. While this led to higher prices for American consumers, it also encouraged domestic companies to produce locally.

Social Benefits of Protectionism

Protectionism is sometimes necessary in trade to ensure that the social benefits of these policies are not overlooked.

Protecting Domestic Jobs and Wages

Free trade allows companies to outsource jobs to countries with lower labor costs, leading to job losses in high-wage countries. Protectionist policies ensure that jobs remain within the country, helping to maintain wage levels and reduce unemployment. Example: U.S. Manufacturing Job Losses and Reshoring Efforts In the late 20th century, millions of U.S. manufacturing jobs moved to China and Mexico due to lower wages. Recent protectionist measures, including tax incentives for companies that keep jobs in the U.S., have encouraged some businesses to bring manufacturing jobs back.

Ensuring National Security and Economic Stability

Some industries are critical for national defense, public health, and economic security and should not rely on foreign suppliers. Protectionist policies ensure that essential goods—such as military equipment, food, and medicine—are produced domestically. Example: The Ban on Chinese Huawei 5G Technology (2019- Present) The U.S. and several European countries restricted Huawei from supplying 5G technology, citing cybersecurity concerns. This protectionist measure ensured that domestic telecommunications networks remained under local control.

Preserving Cultural Identity and National Sovereignty

Protectionism can help maintain cultural industries (such as film, music, and literature) by preventing foreign dominance. Some countries limit the number of foreign movies or TV shows to protect their cultural heritage. Example: Canada’s Cultural Protection Policies Canada requires TV networks and radio stations to air a minimum percentage of Canadian-produced content to promote local artists and filmmakers. Without these rules, Canadian media could be overwhelmed by U.S. content, reducing opportunities for local talent.

Preventing Economic Exploitation by Larger Economies

Free trade often benefits wealthier, industrialized nations at the expense of developing countries. Protectionist policies help weaker economies strengthen their industries before fully engaging in global markets. Example: African Nations Imposing Tariffs on European Agricultural Imports Many African nations heavily tax agricultural imports from Europe to protect their local farming industries. This policy helps small farmers compete against heavily subsidized European agriculture.

Balancing the Risks and Benefits of Protectionism

While protectionism is sometimes necessary in trade, it's crucial to balance the risks and benefits of these policies.

When Protectionism Works Well

Short-term protection of new industries allows them to grow before facing global competition. Preventing reliance on foreign supply chains ensures economic and national security. Supporting domestic jobs and wages strengthens local economies.

When Protectionism Becomes Harmful

Overuse of tariffs and quotas can lead to higher consumer prices. Protectionist policies may trigger trade wars, reducing overall economic growth. Lack of foreign competition can make domestic industries inefficient. Example: The Smoot-Hawley Tariff Act (1930) The U.S. passed high tariffs on foreign goods to protect American jobs during the Great Depression. Other countries retaliated with tariffs, reducing international trade and worsening the global economic crisis.

The Need for a Balanced Approach

Countries must use protectionism strategically to support new industries, prevent economic dependence, and protect national security. Overly aggressive protectionism can reduce economic growth and lead to diplomatic tensions. A hybrid approach, combining free trade with targeted protectionist policies, is often the most effective solution.

How Protectionism Affects Forex and Crypto Markets

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Protectionism: The Rules of the Game Change

Protectionism abruptly alters the rules of the trade game, and financial market participants like forex and cryptocurrency traders have to respond quickly to the new order. As you will see, the impact of protectionism on global trade is complex, and so are the responses of the forex and cryptocurrency markets. That’s why it’s essential to closely monitor protectionist developments and devise a plan to respond to the volatility across these markets.

How Protectionism Impacts Forex Markets

The foreign exchange market is the world's largest and most liquid financial market, with a daily trading volume exceeding $6 trillion. As a result, it is the most efficient market, with prices that quickly adjust to reflect new information. When protectionist policies are announced, they create uncertainty and change the economic outlook for affected countries. This impacts the supply and demand for their currencies as traders assess the consequences of the new rules.

Protectionist Policies and Currency Strength

When a country imposes protectionist policies (e.g., tariffs, trade barriers, import restrictions), its currency can either strengthen or weaken depending on investor confidence and economic impact. The key factors that determine currency movement include:

How much the country relies on trade – Export-driven economies suffer if trade barriers reduce foreign demand.
The reaction of foreign investors – If investors see protectionism as a sign of instability, they may sell the currency, leading to devaluation.

Currency Strengthening Due to Protectionism

If protectionism successfully boosts domestic production and reduces reliance on imports, the country’s currency may strengthen due to:

Increased domestic investment.
Stronger economic performance due to local manufacturing growth.
Lower trade deficits.

Example: U.S. Tariffs on Chinese Goods (2018-2019)

2018, the U.S. imposed tariffs on Chinese products to protect American manufacturers. As foreign capital flowed into the U.S. (seeking safer investments), the U.S. dollar (USD) strengthened. The USD appreciated against the Chinese yuan (CNY), causing USD/CNY to rise from 6.3 to over 7.1.

Currency Weakening Due to Protectionism

Protectionism can also hurt a country’s economy, leading to capital flight and a weaker currency. If exports decline due to retaliatory tariffs, investors may sell off the country’s currency, leading to depreciation.

Example: The British Pound (GBP) During Brexit (2016-Present)

The U.K. voted to leave the European Union, effectively adopting a protectionist stance by cutting off free trade agreements with EU nations. Investors feared economic instability, leading to massive capital outflows from the U.K. Result: GBP/USD fell from $1.50 before Brexit to as low as $1.10 in 2022.

Trade Wars and Forex Market Volatility

Protectionist measures often trigger trade wars, where countries impose retaliatory tariffs on each other’s goods. These trade wars cause forex markets to become highly volatile as investors react to new trade restrictions.

Example: The U.S.-China Trade War (2018- Present)

The U.S. imposed tariffs on Chinese goods, and China responded with tariffs on U.S. imports. As uncertainty increased, forex traders began speculating on USD/CNY movements. The USD/CNY became highly volatile, creating trading opportunities for forex investors.

Capital Flows and Safe-Haven Currencies

Protectionist policies often lead to economic uncertainty, prompting investors to move their capital into safe-haven currencies like:

U.S. Dollar (USD) – The world’s reserve currency.
Swiss Franc (CHF) – Traditionally used as a safe-haven currency during global instability.
Japanese Yen (JPY) – Strengthens when global trade slows, as Japan has a trade surplus.

Example: USD and JPY Strengthening During Global Trade Uncertainty

During the U.S.-China trade war, global investors sought safe-haven currencies like the USD and JPY. The USD strengthened against emerging market currencies (CNY, TRY, BRL), while the JPY gained value.

How Protectionism Impacts Cryptocurrency Markets

Protectionist policies and trade wars also impact cryptocurrency markets. The volatility and uncertainty these events create often cause traders to shift their focus from traditional financial markets to cryptocurrency assets.

Bitcoin as a Hedge Against Trade Uncertainty

Protectionism creates economic instability, which often increases Bitcoin demand. When fiat currencies weaken due to protectionist policies, investors shift capital into Bitcoin as a store of value.

Example: Bitcoin Surge During U.S.-China Trade War (2019)

As trade tensions escalated, BTC prices rose from $4,000 to over $10,000 in mid-2019. Investors used Bitcoin to hedge against currency devaluation and trade uncertainty.

Crypto as an Alternative for Cross-Border Transactions

When countries limit foreign trade, businesses and individuals may turn to crypto for cross-border payments. Stablecoins like USDT (Tether), USDC, and DAI become popular when international banking systems are restricted.

Example: Chinese Businesses Using USDT for International Trade

Due to U.S. tariffs and restrictions on Chinese goods, some businesses settled trade deals outside traditional banking channels using stablecoins.

Increased Crypto Adoption in Countries Facing Trade Restrictions

Protectionist policies can push people to use crypto as an alternative to traditional finance. Cryptocurrency usage increases if a government blocks international bank transfers or restricts foreign exchange.

Example: Venezuela’s Shift to Bitcoin and USDT

Venezuela’s government imposed strict trade controls and currency restrictions. Due to hyperinflation and sanctions, businesses and individuals turned to Bitcoin and USDT for trade.

Government Crackdowns on Crypto to Enforce Protectionism

Some governments see crypto as a way for individuals and businesses to bypass trade restrictions. In response, they ban or regulate crypto transactions to maintain control over capital flows.

Example: China’s Crypto Ban (2021)

The Chinese government banned crypto trading and mining to prevent capital flight amid rising U.S.-China trade tensions. Despite the ban, Chinese traders continued using offshore exchanges and decentralized finance (DeFi) to access crypto.

Forex and Crypto Trading Opportunities from Protectionism

Forex Trading Strategies for Protectionist Markets

Go long on currencies in protectionist countries if trade policies strengthen domestic industries.
Short currencies of export-dependent nations if trade restrictions weaken their economies.
Trade forex volatility during trade war announcements and policy changes.

Example: Trading USD/CNY During the U.S.-China Trade War

Traders profited from USD/CNY volatility as tariff news caused price swings.

Crypto Trading Strategies for Protectionist Markets

Buy Bitcoin as a hedge against fiat currency devaluation.
Use stablecoins for cross-border transactions in restricted markets.
Monitor DeFi platforms if governments tighten capital controls.

Example: Investing in BTC During Trade-Driven Economic Instability

Bitcoin prices surged during trade wars and economic uncertainty, providing profit opportunities for investors.

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Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon clarifies the complex world of economic events for traders seeking data-driven decisions. Get started for free to get AI-powered economic insights today.

How Traders Can Profit from Protectionist Policies

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A. Forex Trading Strategies for Protectionist Markets

1. Trading Safe-Haven Currencies During Protectionist Uncertainty

Protectionist policies introduce economic uncertainty. Investors respond by seeking refuge in safe-haven currencies. When global trade slows, safe-haven currencies tend to appreciate. The U.S. Dollar (USD) benefits from trade instability as global investors move to USD. The Swiss Franc (CHF) historically serves as a safe-haven currency during economic uncertainty. The Japanese Yen (JPY) strengthens when global trade slows due to Japan’s trade surplus. For example, the Japanese Yen (JPY) strengthened during the U.S.- China trade war (2018-2019). As the U.S. imposed tariffs on China, global markets became volatile. Forex traders capitalized on the opportunity as USD/JPY dropped from 114 to 104.

2. Shorting Currencies of Export-Dependent Nations

Protectionism weakens the currencies of countries that rely heavily on exports. When trade barriers reduce demand for a country’s exports, its currency depreciates. Traders can short these currencies to profit from their decline. For example, shorting the Chinese Yuan (CNY) during the U.S.-China trade war (2018) was profitable. In 2018, as the U.S. imposed tariffs on Chinese goods, demand for CNY fell. Investors sold CNY in anticipation of a weakening Chinese economy. The USD/CNY jumped from 6.3 to 7.1, allowing traders to profit from shorting CNY.

3. Trading Forex Volatility During Trade War Announcements

Protectionist policies lead to unpredictable swings in forex markets. Traders can exploit price volatility by entering short-term trades around significant announcements. Key protectionist announcements that impact forex markets include new tariffs or trade restrictions, retaliatory trade measures from other countries, and government interventions to support domestic industries. For example, trading USD/EUR around Brexit announcements produced swift profits for forex traders. As the U.K. negotiated its exit from the EU, GBP and EUR experienced high volatility. Forex traders entered short-term trades around Brexit-related news to profit from price swings.

B. Crypto Trading Strategies for Protectionist Markets

1. Buying Bitcoin as a Hedge Against Fiat Currency Devaluation

Protectionist policies can weaken national currencies, leading investors to buy Bitcoin (BTC) as an alternative store of value. When countries restrict trade and capital outflows, Bitcoin demand rises. For example, Bitcoin surged during the U.S.-China trade war (2019). As trade tensions escalated, investors looked for safe-haven assets. BTC rose from $4,000 to over $10,000 as investors sought protection against trade war uncertainty.

2. Using Stablecoins for Cross-Border Transactions in Restricted Markets

When protectionism limits access to international banking, businesses use stablecoins for transactions. USDT (Tether), USDC, and DAI are commonly used in countries facing trade restrictions. For example, Venezuelan businesses used USDT to evade trade barriers. Due to strict trade policies and hyperinflation, Venezuelan businesses struggled to trade internationally. Many turned to USDT to settle transactions with foreign suppliers.

3. Monitoring Crypto Regulations in Protectionist Countries

Governments may ban or regulate crypto to prevent capital flight caused by trade restrictions. Traders should monitor regulatory changes and adjust their holdings accordingly. For example, China’s crypto crackdown and offshore trading in 2021 illustrated how governments can limit crypto use. China banned crypto exchanges and mining operations in 2021 to control capital outflows. Chinese traders continued using offshore exchanges and decentralized finance (DeFi) platforms despite the ban.

C. Using AI-Powered Market Intelligence to Stay Ahead of Protectionist Shifts

1. Why Traders Need AI for Protectionist Policy Monitoring

Protectionist measures are unpredictable and can trigger sudden market shifts. AI-powered platforms help traders track government policies and market reactions in real time.

2. How GoMoon.ai Helps Traders Navigate Protectionist Market Volatility

GoMoon.ai tracks trade policy changes and assigns impact scores to economic events. The platform provides real-time alerts on tariffs, sanctions, and currency fluctuations. It also uses AI-driven forecasts to predict market reactions to new protectionist policies. For example, if GoMoon.ai detects rising protectionist policies in the U.S., traders can prepare by buying USD and shorting CNY. If protectionism leads to a capital flight into Bitcoin, traders can anticipate a BTC price increase.

D. Real-World Trading Strategies for Protectionist Markets

1. Forex Trading Strategy: Hedging Against Trade War Risks

A solid forex trading strategy for protectionist policies is to buy USD and short CNY when U.S.-China trade tensions rise. Enter short-term trades around trade policy announcements, and use forex options to hedge against unexpected currency swings.

2. Crypto Trading Strategy: Using Bitcoin as a Protectionist Hedge

A solid crypto trading strategy for protectionist policies is to buy Bitcoin when protectionist policies weaken fiat currencies. Use USDT and decentralized exchanges for cross-border transactions. Monitor regulatory trends to avoid government-imposed restrictions.

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