Lack of imports can eradicate competition and result in higher prices in the market.
Free trade refers to the absence of trade restrictions, such as quotas and tariffs, allowing transactions between international buyers and sellers to commence without barriers. However, when a government wants to protect the local industry from international competition, it can raise obstacles to foreign investment. This practice of not participating in free trade is called protectionism and can have serious effects on a country's economy.
Rising Prices
Free trade guarantees competition between those supplying the same -- or similar -- products and services, keeping supply at high levels and prices low. However, when a government does not allow equality on the market for foreign companies, competition receives a blow. Especially when there is just one or only a few domestic companies on a specific area of the economy, then the supplier has the ability to increase the cost without worrying consumers may turn elsewhere.
Reduced Economic Activity
The majority of imported goods are not sold through international shops, such as e-commerce websites, but are supplied through local shops. Therefore, the imposed tariffs and quotas, which are restrictions on the amount of imported goods, affect local merchants directly, as cost to fill up their selves becomes higher. Furthermore, when purchasing power (what a unit of currency can buy) shrinks, consumer spending is also reduced, limiting market activity.
Protecting Local Industry
Protectionist measures aim to protect local industries from cheaper imported products that may be more attractive to consumers because of their low price. As Edward Younkins, professor at Wheeling Jesuit University, suggests, "Protectionist policies may 'save' some jobs in a specific industry, but only at the expense of the overall welfare of the country." This is because allocating resources (human and material) to protect an insufficient industry the government fears it may be destroyed by international giants can deter productivity of industries the country has a comparative advantage in.
Entrepreneurship
Free trade can prevent prospective investors from entering a specific economic area, as the profit margin can be extremely small. On this occasion, protectionism allows budding businessmen to enter the market. For instance, in the field of computer software, large corporations such as Microsoft and Apple have the lion's share. However, if their dominance is limited by trade restrictions, domestic entrepreneurs can fill the gap and take advantage of the market's potential.
