Protectionism Flashcards
What is it?
Protectionism is the act of guarding a country’s industries from foreign competition, by imposing restrictions on free trade. If a country employed several protectionist measures, then a trade deficit would reduce. This is because they will be importing less due to tariffs and quotas on imports
Why?
To protect infant industries to allow a certain industry to develop until it is able to trade freely. Based on concept of high start up costs. Protectionism could be used to correct market failure. It can deal with demerit goods and protect society from them.
Government may want to protect domestic jobs and prevent them from being offshored.
Some countries may impose trade restrictions in response to trade barriers imposed by other countries
Tariffs
Tariffs are taxes on imports to a country. The aim of tariffs is to increase quantity demanded for domestic goods. Result in higher prices for consumers since more inefficient domestic producers enter the market.
Quotas
Limits the quantity of a foreign produced good that is sold on the domestic market. Leads to a rise in the price of the good for domestic consumers, so they become worse off.
Subsidies to domestic producers
Makes domestic goods relatively cheap compared to imports. Encourages domestic production to increase, resulting in fall in price
Non-tariff barriers - Voluntary export restraints (VERs)
When two countries agree to limit volume exports to one another over a period of time - protect domestic industries
Embargoes
Complete ban on trade with another country
Excessive administrative burdens
Increase cost of trading, hence discourages imports. Difficult to trade with countries imposing red tape. Harmful to developing countries who cannot access these markets
Impacts on consumers
Can distort the market and result in loss of allocative efficiency. Prevents industries from competing in a competitive market and there is a loss of consumer welfare. Consumers face higher prices.
Impacts on producers
By not competing in a competitive market, firms have little incentive to lower costs of productions
Impacts on governments
Tariffs could raise revenue for the government, which could be used to redistribute income to the poor or improve public services
Protectionism could lead to government failure
Risk of retaliation from other countries
Impacts on economy
Imposes an extra cost on exporters, which could lower output and damage the economy
