Protectionism Flashcards
What is protectionism
The approach used by governments to protect domestic producers by imposing restrictions on trade of goods and services
What are trade barriers
Measures designed to restrict imports
What is DUMPING
Where an overseas firm sells large quantities of a product below cost in the domestic market
What are tariffs
Tax on imports to make them more expensive
What are quotas
The physical limit on the quantity of imports allowed into a country
What are the reasons for protectionism? Consider the use of trade barriers on firms that dump
Due to protectionism, trade barriers may be used if governments feel that an overseas firm may dump and firms may do this to destroy overseas competitors hence, dumping’s considered to be unfair competition for domestic producers as if large quantities of very cheap imports are being sold below costs in a country, domestic producers will find it difficult to survive in the long term
What are the reasons for protectionism? Consider the use of trade barriers on overseas competitors (Domestic industries needing protection)
Trade barriers may be used if domestic industries need protection from overseas competitions in order to save jobs. On the other hand, a government may be criticised if jobs are being lost due to cheap imports.
What are the reasons for protectionism? Consider infant industries
Infant industries need protection as they are new industries that are yet to be established and many argue that they should be protected from strong overseas rivals until they can grow, become established and be able to exploit economies of scale
What are the reasons for protectionism? Consider governments gaining tariff revenue
Governments can raise tax revenues if it imposes tariffs on imports and this money can be allocated towards government services in order to improve living standards in that country
What are the reasons for protectionism? Consider current deficits
Trade barriers may be used by a country if it has a persistent current account deficit because a country has to pay its way in the world and if a current account deficit gets out of control, action may be required by the government where they reduce imports and increase exports at the same time to reduce the deficit.
How are tariffs a method of protectionism?
Tariffs make imports more expensive as governments impose a social tax on them hence, reducing demand for imports and increased demand for goods produced domestically
What are advantages of tariffs?
Imports becoming more expensive (increased demand for goods produced domestically)
Raising tax revenue (can be allocated towards provision of government services)
Improving the current account as there will be less money going out the economy
What are disadvantages of tariffs?
If tariffs are set too high, imports may cease and government revenue will be 0
Consumers won’t benefit in the short term since they raise prices meaning they will have lower disposable incomes to spend
Other countries could retaliate by imposing tariffs in response tariffs on their imports hence, possibly resulting in a trade war
How are quotas a method of protectionism?
Placing a physical limit on the amount allowed into the country can restrict the number of imports hence, domestic producers face less of a threat as they will have more of a market to themselves
What are advantages of quotas?
- Domestic goods become cheaper hence consumer spending is likely to increase and governments will be able to get a steady source of revenue which improves the economy
- In the short term, the impact on prices could be limited as it may take a while for shortages to force the prices up and domestic producers could increase their supply to “fill in the gap” in the market.
