Protectionism Flashcards
What is protectionism?
Giving preference to home producers by making it harder and more expensive for overseas companies to export to your country
Aim of protectionism
“Cushion” domestic businesses and industries from overseas competition
Overall idea of protectionism
Advocates of protectionism believe that governments should intervene to change the pattern of international trade
Goal: to increase economic prosperity by either increasing a country’s exports or by reducing the amount imported
Examples of protectionist trade policies
- tariffs
- quotas
- government regulations and subsidies
What is open trade?
An economic policy of not discriminating against imports from and exports to other countries
Benefits to open trade
- countries can benefit from comparative advantage
- businesses can better achieve EOS
- encourages competition and economic efficiency
- enables businesses to grow beyond their domestic borders
What are import quotas?
A tariff or duty that raises the price of imported products and causes a reduction in domestic demand and an expansion in domestic supply
What are tariffs?
Volume limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period
What are domestic and export subsidies?
A payment to encourage domestic production by lowering their costs
Strengths of tariffs
+ help inefficient firms survive- benefit staff, managers and shareholders
+ without tariffs, workers would have lost their jobs
+ revenue raised from import taxes- fund public services (health and education)
Weaknesses of tariffs
- make imported products more expensive
- cause long run competitive damage to the very firms they are designed to help
Strengths of quotas
+ face less foreign competition
+ workers- greater job security and an increased likelihood of inflation- boosting pay rises
+ shareholders- gain via bigger dividends and higher share prices
+ if quotas prevent job loses, the government could indirectly benefit due to higher levels of employment
Weaknesses of quotas
- do not generate income for government
- retaliation from other countries
Strengths of government legislation
+ domestic firms face less competition- higher profits for shareholders
+ greater job security for staff
Weaknesses of government legislation
- provoke retaliation- if a country bans another country’s product, the victim is likely to fight back and introduce a ban of its own against the aggressor
- reducing importer competition means higher prices and less product choice for consumers
Strengths of subsidies
+ help poor by lowering prices and by preserving jobs in internationally uncompetitive industries
+ improve a country’s balance of payments by decreasing imports and increasing export sales
Weaknesses of subsidies
- subsidies have to be financed- higher rates of taxation for households and for businesses operating in industries that do not receive government subsidies
Positives of protectionism
+ infant industry protection- help establish themselves- including achieving EOS
+ protection of strategic industries- protect jobs, skills and capabilities
+ protection against import dumping- dumping is a form of predatory pricing which can seriously damage domestic industries
Negatives of protectionism
- higher prices for consumers- particularly arising from import tariffs or quotas that restrict marker supply
- retaliation from other countries- protectionist measures often result in retaliation - such as price wars
- extra costs for exporters- protectionism that becomes widespread in global industries increases the costs facing domestic firms trying to export
