Protectionism Flashcards
Protectionism Definition
The use of trade barriers to protect domestic producers from foreign competition.
Types of protectionism
Tariffs (import duties)
Quotas
Domestic subsidies
Embargoes
Tariff Definition
Tax on imports (sometimes applied to exports).
Impacts of Tariffs
- Raises the price of imports, leading to a reduction in their demand.
- Allows domestic products to become more price competitive.
Tariff Evaluation
- A tariff will be more effective at raising tax revenue when demand for imports is price inelastic. However, it will be more effective at protecting domestic producers when demand for imports is price elastic.
- However, a tariff will be less effective when the import price plus tariff is still below the domestic producer’s price or when the firms that are selling the imports are able to absorb the tariff into their profit margins and therefore do not need to raise prices.
Quotas Definition
Limit on the value or volume of imports (sometimes applied to exports too).
Impact of Quotas
- Restricts the supply of imports, which raises their price leading to a reduction in demand.
- Allows domestic products to become more price competitive.
Quotas Evaluation
- A quota is likely to be less effective than a tariff as it does not raise any revenue to the government. This results in a larger deadweight welfare loss to society. Quotas are therefore less likely to be used by governments.
- In addition, domestic producers are likely to remain internationally uncompetitive due to the higher prices. Foreign importers also benefit from the higher prices they receive.
Domestic Subsidies
Payments by the government to domestic producers to lower their costs of production.
impact of Domestic Subsidies
- Lowers costs of production, which reduces the price domestic producers sell at.
- Allows domestic products to become more competitive with imports
Evaluation of Domestic Subsidies
- In some ways, domestic subsidies are more beneficial than tariffs and quotas since domestic consumers do not suffer from higher prices and therefore lower living standards.
- However, subsidies are costly. To fund a subsidy, the government may have to raise taxes or divert spending from other areas, which incurs an opportunity cost.
Embargoes Definition
a complete ban on the trade of a particular product (e.g. illegal drugs) or trade with a particular country (e.g. USA and North Korea).
Reasons for embargoes
- Banning trade of a particular product might occur because the government considers the product to be harmful.
- Banning trade with a particular country might occur due to political problems / disputes.
Arguments in favor of protectionism
1) Infant (sunrise) industries.
2) Declining (sunset) industries.
3) Strategic industries.
4) Protect employment.
5) Prevent dumping.
6) Correct a current account (balance of payments) deficit.
7) Raise tax revenue.
Infant Industries
New firms/industries need time to be able to grow and compete with established foreign firms.
