4.1.4 Protectionism Flashcards
What is Protectionism ?
• Protectionism is the theory or practice of shielding (or protecting) a country’s domestic industries from foreign competition by taxing imports, imposing quotas or passing laws
Reasons for protectionism?
• It is human nature to want to protect what is ours
• Protectionism is a government‘s actions to protect the businesses and interests of their own nation
• Government is looking to protect what is theirs
Protection for domestic industries?
• The main reason that a government will seek to put in place protectionist policies is to protect their domestic industries
• For example the French government will seek to protect French industries so may place tariffs and quotas on imports of wine and cheese
• This stops the French markets being flooded with cheap imports, which will affect the sales of the domestic businesses
What is a tariff?
• A tariff is a tax placed on an import to increase its price and decrease its demand
• Tax can be imposed by governments to raise revenue and to restrict imports
• A tariff is likely to raise the final price to the consumer – therefore a fall in demand for the goods
• Consumers will switch consumption to domestic goods
Tariffs – impact on business?
• Imposing a tariff will help a country to: • Protect their fledgling (new) domestic
industries from foreign competition
• Protect their aging and inefficient industries from foreign competition
• However:
• If a business faces having to pay stiff tariffs they may have to reduce production and this can mean job losses
3 reasons tariffs are imposed?
1 To raise tax revenue
Poorer countries may impose heavy tariffs on imports to raise much needed funds for healthcare and education
#2 For environmental reasons
Tariffs are sometimes only placed on goods that have negative externalities e.g. cigarettes (sin tax)
#3 Protectionism
Advantages of tariffs
• Domestic produced goods do not incur the tariff and so are likely to be cheaper
• Tariff protection allows domestic businesses to sell more because they gain a price advantage compared to imports
• Domestic producers gain price advantage
• It can ensure better job security
• It can raise important tax revenue for government which can be spent possibly on infrastructure
Disadvantages of tariffs
• Some products, even with tariff cost added, do not put off potential customers willing to pay for unique or unusual imported products
• Tariffs may just increase the costs to consumers
• Other countries may retaliate by imposing their own tariffs on imports
What is an import quota?
• A quota is a physical limit on the quantity of goods imported or exported for example only 10,000 units a year
• Imposing a limit on the quantity of goods that are imported will increase the share of the market available for domestic products (made in the home country)
Why are quotas imposed?
• When an import quota is set, it allows a country to be sure of the amount of the good imported from the foreign country
• When there is a tariff, if the supply curve of the foreign country is unknown, the quantity of the good imported may not be predictable, quotas are predictable because the actual amount is known
Uses of import quotas?
• Import quotas are imposed to protect jobs of domestic producers
• Import Quotas are also imposed as a bargaining chip to be used in negotiations on trade
• Other uses for quotas are to protect strategic industries such as defence and agriculture. In market environments where imports are on the rise, quotas are more protective than tariffs.
Advantages of import quotas
• #1 protects domestic industries e.g. USA calling for quotas on steel imports
• #2 safeguards jobs in domestic industries
• #3 Benefit to the customers, the price of imported goods rise so domestic goods appear cheaper and better value in comparison
Disadvantages of quotas
• When one country uses quotas, its trading partners do the same and the end result is less exporting opportunity for all producers and higher prices for all consumers.
• Quotas are also complex for the country using them. They require a lot of paperwork indicating exact amounts of products for each country facing a quota.
• It is also difficult to measure the precise degree of protection quotas offer.
Government legislation
• Sometimes a country will not be able to set tariffs or quotas because of trade agreements or membership of a trade bloc, this means they need to come up with other ways of protecting their domestic industries from floods of cheap imports
• They can do this through legislation e.g. No fakes, safety of toys etc.
Advantages of government legislation
• Government legislation can be a very powerful tool in preventing fake imports into countries
• For example any toys imported into the UK must have a CE mark
• This indicates that the product conforms to EU safety regulations
• The added benefit is it means customers can trust the products that they are buying are genuine
