4.1.4 Protectionism Flashcards
Protectionism definition
Protectionism means giving preference to domestic producers by making it harder for foreign companies to export to your country.
The three major forms of trade barrier are:
tariffs, quotas, legislation and regulation.
What is a tariff
A tariff is a tax imposed on
an imported product to allow
it to enter a country.
Imposing a tax on a product being imported automatically reduces its
competitiveness, as
the tariff will drive up the price. This reduces the
ability of the product to compete with domestically produced rivals.
The two main scenarios in which governments tend to use tariffs are:
1 To protect a declining industry
2 To protect ‘infant’ industries.
Benefits of tariffs
As tariffs help firms to survive, they protect jobs of firms whose rivals are being taxed. Tariffs also indirectly protect the other businesses
that rely on these firms for trade: suppliers and local firms that would suffer if unemployment rose. Tariffs raise tax revenues, allowing governments to increase spending on public services
Drawbacks of tariffs
Imposing tariffs pushes up prices, reducing consumers ability to buy the product, reducing standards of living.
Tariffs help inefficient firms to survive, potentially harming competitiveness. Without tariffs there is far greater incentive for these firms to improve
what they do
Import quotas
A quota is a physical limit on the volume of a product that can be imported in a year. Once the quota is used. only domestically produced goods will be available.
Import quotas aims
Quotas are designed to protect and encourage domestic producers. If
imports are limited, this is likely to push prices up. This should encourage
domestic producers to increase the amount they are willing to supply. In
addition, quotas are likely to improve the current account of a country’s
balance of payments.
Benefits of quotas
Domestic firms face less competition, improving their competitiveness. This improves profit for shareholders and job security for workers. Preventing unemployment theoretically reduces
government spending on benefits
Drawbacks of quotas
No extra tax revenue is gained by the government. They push up prices domestically for consumers
Government legislation
Legislation relating to consumer protection and environmental protection can act as a barrier to imports. If a government imposes new, stronger standards for safety or emissions in certain industries, importers may find their products suddenly become illegal. This in turn necessitates design change, which takes a significant period of time, before importing can resume.
Domestic subsidies
A subsidy is a payment made by government to a business producing a certain product or located in a particular area that the government wishes to support. The government pays a figure, usually per unit of output, to sustain firms that would otherwise be unable to compete.
How subsidies help
The subsidy can be thought of as reducing the unit costs by the amount
of the subsidy, thus boosting margins, or allowing companies to cut their
selling price. Boosting margins may keep some businesses operating in
markets from which they would otherwise withdraw, protecting jobs and domestic supply of that product. The other consequence is to make it easier to export these products, as
with a lower selling price they may be more price competitive in foreign
markets.
Benefits of paying subsidies
Subsidies in effect stimulate demand, perhaps allowing struggling businesses to boost order
books, allowing investment in more efficient production.
Subsidies have a positive effect on the balance of payments by reducing imports and boosting
exports from firms receiving the subsidies
