Protection Flashcards
What is protection?
The use of artificial barriers which restrict the free flow of goods and services in international trade, giving domestic producers an artificial advantage
Why does dumping create a need for protection?
If a country has an oversupply of goods, it may dump excess products on another economy at a very low price
This hurts local businesses (especially in developing countries) who cannot compete
A country may impose a quota on imports to restrict dumping
Why do infant industries create a need for protection?
Free trade results in increased levels of competition between firms, with those that can achieve economies of scale generating the most profits
This climate makes it difficult for new firms to establish a foothold in global markets, as they are unable to achieve the same production levels as established firms
Protection for infant industries should only be temporary, as it may result in inefficient resource allocation if firms become reliant on government support
Why does employment create a need for protection?
If overseas countries offer cheaper production costs, firms may move internationally to increase efficiency, leading to domestic job losses
An increase in unemployment has the potential to cause economic contractions/recessions
Imposing tariffs or barriers can prevent these job losses, but may come at the cost of efficient export industries and decreased international competitiveness
Why does defence/self-sufficiency create a need for protection?
It is a form of national security for countries to produce their own goods, such as weapons or intelligence services
In the event of a conflict, trading dispute or breakdown in supply lines, nations must be able to support themselves
This means that nations must have the capacity be produce essential goods such as food, petrol and other products
What are the advantages of tariffs?
stimulation of domestic production/employment
government gains revenue
improvement in trade balance
What are the disadvantages of tariffs?
‘imported inflation’ as the equilibrium cost increases
potential for trade wars
What are quotas?
Quantitative restrictions on certain categories of imported goods
What are the advantages of subsidies?
similar benefits to tariff
price advantage for local consumers as there is less inflationary pressure
What are the disadvantages of subsidies?
distortion of resource allocation as they support industries inefficient on international standards
direct cost on government budgets
What are local content rules?
Specifies that goods must contain a minimum percentage of locally produced parts
In Australia, 55% of free to air programs between 6pm-midnight must be Australian made entertainment
What are export incentives?
Providing domestic producers with assistance (grants, loans or technical advice) to encourage businesses to enter global markets
AUSTRADE advises businesses on overseas investment opportunities and reimburses the costs of advertising for exports
What are four effects of protection on the domestic economy?
Distortion of Research Allocation; although local industries initially gain, long-term production will become less efficient
Increased Inflation; higher prices from tariffs may lead to increased wage pressures and costs of production
Slowing Economic Growth; as resources are not used efficiently, the capacity for economic growth is limited
Decreased Exports; protected industries tend not to seek overseas markets, due to the high profit returns locally
What are four effects of protection on the global economy?
Reduced Access to Markets; developing economies are excluded from access to advanced economies, especially in the area of agriculture
Increased Income Inequality; international trade barriers tend to favour advanced economies, leading to widening disparities between economies
Global Political Tensions; threat of trade wars and other retaliatory action
Reduced Global Trade; can lead to decreased economic growth & development
