4.1.4 Protectionism Flashcards
What is protectionism?
involves any attempt by a country to impose restrictions on trade in goods and services
Tariffs
raises price of imported goods and limits the value of imports permitted into a country
Export subsidies
a payment to encourage domestic production by lowering their costs
or involve government aid for domestic businesses facing financial problems
Why use protectionism?
- protects domestic market
- more local growth opportunities
- lower imports - help reduce import levels and allow the country to increase its trade balance
- response to chronic trade gap and deficits
- protect fledgling infant sectors
- boosts economy due to rise is domestic production
Disadvantages of trade protectionism
- stagnation of technological developments - domestic business don’t need to worry about foreign competition so they have little incentive to innovate or invest in R+D for new products
- limited choices for consumers - access to fewer goods due to limitation of foreign goods
- Increase in prices due to a lack of competition - consumers will have to pay more with no significant improvement in product
- economic isolation - political and cultural isolation
Example of trade protectionism
USA
- he placed bn of $’s of goods from around the world, especially China
- wanted to cut the trade deficit with China
What is trade deficit?
the difference between how much one country buys from another country compared to how much it sells
Why do governments use trade protectionism?
- protect key politically strategic industries
- raise extra revenues for governments with budget deficits
- response to a recession/stagnant domestic demand
3 main kinds of trade protectionism
- import quotas
- tariffs
- domestic and export subsidies
What is an import quota?
-quantitative limits on the level of imports allowed or a limit the value of imports permitted into a country in a given period of time
Drawbacks of quotas - government
- doesn’t generate any revenue for the government
- can distort international trade
Benefits of quotas - business
- if they cause domestic production and incomes to expand, there will be a beneficial impact on taxes paid
- protect industries from global competition
- boosts local investment
- creates jobs
What is a tariff?
- raises on the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply
- Improves a nations trade
Domestic subsidy
involves government help for domestic businesses facing financial problems
Export subsidy
A payment to encourage domestic production by lowering their costs
-encourages exports of goods and discourage sale of goods on the domestic market through direct payments, low coast loans for exports
Benefits of tariffs - governments
- government receive the money by charging the tax
- can serve as an opening point for negotiations between two countries - good way of brining nations together
- can help stabilise and regular its own industries
Benefits of tariffs - businesses
- domestic producers will benefit - makes more competitive compared to imports
- protect domestic jobs and businesses
Drawbacks of tariffs - governments
- can antagonise existing issues between governments, leading to political and economic consequences
- UK export firms will face higher tariffs and they could suffer falling demand
Drawbacks of tariffs - businesses
- increase costs of imports, leading to higher prices for consumers
- restriction of competition encourages inefficient firms -may nit race incentive to innovate
drawbacks of quotas - business
- can enhance monopoly growth for those with import licenses
Benefits of quotas - governments
- allows for fdi to occur
- boosts local investment
- creates jobs
Benefits of subsidies - government
- helps to lower prices and control inflation
- greater supply of goods - governments provide an incentive that allows more access to their population to goods and services such as water, food and education
Benefit of subsidies - business
-prevents the long-term decline of industries - fishing and farming
Drawbacks of subsidies - government
- difficult in measuring success - hard to quantify subsidies
- higher taxes - impose higher taxes so the government can subsidise industries
Drawbacks of subsidies - business
-higher taxes - impose higher taxes so the government can subsidise industries
What is dumping?
Selling off surplus stock on a foreign market at below cost which puts domestic businesses in foreign market at a disadvantage
