Protectionism

Question 1

Reasons for protectionism

Answer 1

An approach used by a government to protect domestic producers
Reasons why governments impose trade barriers

Preventing dumping- when foreign producers sell goods below cost in a domestic market
Protecting employment
Protecting infant industries
Gain tariff revenue- a government can raise money if it imposes tariffs on imports.
Preventing entry of harmful/ undesirable goods
Reduce current account deficits- a government might try to reduce imports and increase exports to reduce the deficit
Retaliation- to fight back dumping/ can cause trade war
National security- a nation might be at threat if it becomes over-dependent on trade with other countries for its economic stability

Question 2

Tariffs

Answer 2

Makes imports more expensive- reduces demand for imports/ increases demand for domestically produced goods
Helps raise revenue for the government
May not have as much impact if demand for the import is price inelastic

Question 3

Import quotas

Answer 3

Another way of reducing imports is to place a physical limit o the amount allowed into the country
Helps reduce threat faced by domestic producers
May raise prices of imports
Less imported goods means demand can be met by domestic producers
Improves consumer choice
Helps to protect/ increase domestic employment
Embargo- an extreme type of import quotas where imports are completely banned from a country

Question 4

Other trade barriers

Answer 4

Government legislation:
Governments reduce imports by insisting that imported goods meet strict regulations/ specifications
Goods that fail to meet environmental/ cultural standards might face administrative barriers

Domestic subsidies:
Governments give a subsidy to domestic producers
This involves giving financial support- grants, interest-free loans/ tax breaks to domestic producers who face strong competition from importers
Helps to lower prices- as they reduce production costs and increase supply/ hence forces equilibrium prices down
Makes it easier for exporters/ domestic producers to break into foreign markets

Question 5

Impact of protectionism on businesses

Answer 5

Short term:
Use of trade barriers to reduce overseas competition will benefit domestic businesses
Reduces unfair dumping of goods
Makes import prices higher so domestic producers can compete more easily (only if price elastic)
Helps to increase domestic businesses’ sales volumes/ revenue/ profit
Extra profits could help improve production techniques/ could help with specialisation/ improves efficiency and competitiveness
Quotas allow domestic producers to fill in the gap in demand

Long term:
Business are likely to benefit more from free trade
Free trade encourages competition/ can motivate domestic businesses to increase efficiency and gain bigger market share
Free trade leads to increased specialisation/ raises level of output/ higher sales/ more profit

Protectionism is likely to attract retaliation from overseas governments/ might cause trade wars