Protectionism 4.1.4 Flashcards
What is protectionism?
Refers to the policy of protecting domestic industries against foreign competition.
What are the 4 types of protectionism?
1) Tarrifs
2) Import quotas
3) Legislation and regulation
4) Domestic subsidies
What are tariffs?
A tax imposed on an imported product to allow it to enter a country.
What are quotas?
Is a physical limit on the volume of a product that can be imported in a year.
How are tariffs used to implement protectionism?
Imposing a tax on a product being imported automatically reduces its competitiveness as the tariff will drive up its price. This then reduces the ability of the product to compete with domestically produced rivals
What are the benefits of using tariffs for protectionism?
+ Protect jobs nationally.
+ Indirectly protect other businesses that rely on these firms for trade.
+ Tariffs raise tax revenue, allowing governments to increase spending on public services and the welfare state
What are the drawbacks of using tariffs for protectionism?
- Imposing tariffs pushes up prices, reducing consumers’ ability to buy the product, reducing standards of living.
- Tariffs help inefficient firms survive.
What are the two scenarios when tariffs are used?
1) To protect a declining industry.
2) To protect an infant industries.
What are quotas designed to do?
Quotas are designed to protect and encourage domestic producers. If imports are limited, prices will increase. This then encourages domestic producers to increase the supply.
What are the benefits of using quotas for protectionism?
+ Domestic firms face less competition, improve their competitiveness. This improves profit for shareholders and job security for workers.
+ Preventing unemployment theoretically reduces government spending on benefits.
What are the drawbacks of using quotas for protectionism?
- No extra tax revenue is gained by the government.
- They push up prices domestically for consumers.
What are the drawbacks of using quotas for protectionism?
- No extra tax revenue is gained by the government.
- They push up prices domestically for consumers.
What is government legislation?
Countries might employ measures such as complex legal forms, health and safety inspections and specific product specifications.
These will discourage imports by raising costs.
How is government legislation used as a trade barrier?
- Goods have to meet strict regulations & specifications e.g. toys have to meet strict safety regulations
- NOTE: goods that fail to reach cultural or environmental standards may also face administrative barriers.
What are examples of legislation and regulation
- Import licensing: In this case, the governments grant importers the license to import goods – these can be restricted.
- Intellectual property laws: Patents and copyright protection protecting domestic ideas and products.
- Technical trade barriers include product labelling rules and stringent sanitary standards.
What are subsidies?
Financial support given to a domestic producer to help compete with overseas firms.
How do subsidies work?
How do subsidies help exporters?
If subsidies are given to domestic producers it will lower prices for consumers because subsidies reduce production costs and increase supply –> forces equilibrium prices down.
If subsidies are given to exporters it makes it easier for home businesses to break into foreign markets.
What are infant industries?
Young industries are unlikely to be able to compete against established MNC’s in developed countries, thus require protection, at least in the short term.
What is dumping?
Over-production in developed countries may be released into the markets of developing nations, which undercuts domestic prices and domestic producers may be forced to leave the market.
Dumping is a form of unfair competition as products are being sold at a price that does not accurately reflect their cost.
What are balance payments?
A Placing restrictions on imports may help to reduce a balance of payments deficit on current account.
What are embargoes?
A total ban on imported products.
The UK has imposed embargoes on Syrian oil exports as a political measure.
Key argument for protectionism:
- Infant industry protection
- Protection of strategic industries
- Protection against import dumping
Key argument against protectionism:
- Higher prices for consumers
- Retaliation from other countries
- Extra cost for exporters.
