4.1.4 - Protectionism

Question 1

What is Protectionism?

Answer 1

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.

Question 2

Reasons for protectionism

Answer 2

• 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

Question 3

Protection for domestic industries

Answer 3

• 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

Question 4

What is a tariff?

Answer 4

• 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

Question 5

Tariffs - Impact on Business

Answer 5

• 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

Question 6

Tariffs - 3 reasons they are imposed

Answer 6

1) To raise revenue

2) For environmental reasons

3) Protectionism

Question 7

Advantages of Tarrifs

Answer 7

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

Question 8

Disadvantages of Tarrifs

Answer 8

• 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

Question 9

Import Quota

Answer 9

a physical limit on the quantity of goods imported or exported for example only 10,000 units a year

Question 10

Uses of Import Quotas

Answer 10

• 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.

Question 11

Advantages of Import Quotas

Answer 11

• #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

Question 12

Disadvantages of Quotas

Answer 12

• 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.

Question 13

Other Trade Barriers

Answer 13

Government Legislation
Domestic Subsidies

Question 14

Government Legislation

Answer 14

• 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.

Question 15

Advantages of Government Legislation

Answer 15

• 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

Question 16

Disadvantages of Government Legislation

Answer 16

• Every import into the UK cannot be checked 2% are fake (according to the OECD) so no matter how many laws a country has it cannot prevent ALL fakes from arriving on their shores
• The profits go to organised crime and can be in any sectors including medicine, machinery and clothing

Question 17

Domestic Subsidies

Answer 17

• Subsidy is a way of a government protecting their domestic markets
• Money is given to local producers to make their goods cheaper on the domestic market
• This artificially raises the price of foreign goods relative to domestic goods therefore reducing demand for them

Question 18

Advantages of Domestic Subsidies

Answer 18

• Encourages businesses to increase their production, this can lead to more jobs being created and tax paid back to the government
• Can give domestic producers first mover advantage when exporting to emerging markets (BRICS, MINT)
• Can help domestic businesses to gain economies of scale from extra production

Question 19

Disadvantages of Domestic Subsidies

Answer 19

• Domestic subsidies are a form of protectionism and so is open to retaliation from other nations in return. This may mean higher tariffs or quotas on our exports.
• Subsidies essentially encourage business activity which would be unprofitable and inefficient without the government financial hand out in the form of the subsidy