Sub Topic 1 - Reasons for + Methods of Protection Flashcards
Define ‘PROTECTION’
Any type of government action that has the effect of giving domestic producers an artificial advantage over foreign competitors, including tariffs, import quotas and subsidies.
List the methods for protection:
- Tariffs
- Quotas
- Subsidies
- Local content rules
- Export Incentives
Define ‘INFANT INDUSTRIES’ in terms of reasons for protection
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New industries generally face difficulties and risks in their early years; they stand on a small scale with costs that are relatively higher than those of established competitors in other countries.
These ‘infant industries’ may need to be shielded from competitors in the short-run to enable them to build capacity, establish markets and achieve economies of scale so that they can compete in the global economy; this approach has been used in many emerging economies to contribute to the development of new industries.
The key test for economic credibility of the infant industry argument is whether industry protection is removed over time; if protectionist policies are not removed, there will be no real incentive for the industry to reach a level of efficiency that would enable it to compete without protection.
Define ‘DUMPING’
Dumping occurs when foreign firms attempt to sell their goods in another country’s market at unrealistically low prices; below the price charged in the country’s home market.
May be used to either dispose of large production surpluses or to establish a market position in another country.
Explain protection in order to ‘prevent dumping’
The low prices incurred by dumping are usually only temporary but can have devastating effects on domestic businesses, causing a loss in a country’s productive capacity and higher unemployment.
The only gain from dumping is that it results in lower prices for consumers in the short-term.
Using protectionist methods to prevent dumping is the only reason for protection that is deemed ‘economically sound’.
What is an abuse of dumping protection recently?
In recent years, however, the World Trade Organisation ( WTO ) has questioned whether countries might be unfairly accusing efficient low-cost foreign producers of dumping and abusing ‘anti-dumping’ processes in order to protect their domestic industries; the sectors where ‘anti-dumping’ measures are most common are base metals, plastics, resin and rubber.
What is protection of domestic employment
If local producers are protected from competition with cheaper foreign imports, the demand for local goods will be greater and this will create more domestic employment.
This gains the strongest public support during times of recession when unemployment is rising.
Why do economists not always the protection of domestic employment?
Protection will tend to distort the allocation of resources in an economy away from areas of more efficient production towards. In the long run, this is likely to lead to higher levels of unemployment and lower growth rates.
If a country protects its industries, it is possible that other countries will retaliate and adopt similar protectionist policies; the net result could be that the economy might have higher employment in less efficient protected industries.
What does Defence & National Security & Self-sufficiency have to do with protectionist policies?
Countries sometimes have non-economic reasons for wanting to retain certain industries;
- Major powers generally want to retain their own defence
industries so that they can be ready for conflict.
For this reason, a country such as the United States would not buy crucial defence equipment from overseas countries even if they could produce it cheaper because this would make them reliant on other countries for their national security.
The argument for self-sufficiency of defence and medical supplies, as well as energy, food and essential manufactured goods has become much stronger in recent years in the wake of global crises such as Russia’s invasion of Ukraine, the COVID-19 pandemic and growing concerns about threats to national security from China.
Has the use of protectionist polices increased or declined recently?
Declined
Define ‘TARIFFS’
Taxes on imported goods imposed for the purpose of protecting Australian industries; they have the effect of raising the price of imported goods, making the domestic producer more domestically competitive, not internationally competitive.
Provide some economic effects of tariffs
Domestic producers supply a greater quantity of the good; the tariff stimulates domestic production and employment.
More domestic resources are attracted to the protected industry; this leads to a reallocation of resources towards less efficient producers who are unable to compete with foreign producers, causing world GDP to decline.
Can provoke a retaliation effect, where a trading partner imposes a trade barrier against a country imposing a tariff on its exports.
The tariff raises revenue for the government, but that is not the primary objective; the more successful the tariff as a protectionist policy in terms of how many imports it restricts, the less revenue it will raise.
Consumers pay a higher price and receive fewer goods; this redistributes income away from consumers to domestic producers.
Why do governments implement tariffs? (3)
To present barriers to trade with other nations for political reasons.
Domestic increases in manufacturing decrease unemployment and reliance on imports which benefits the balance of payments.
Following suit of other nations if there are tariffs across the world in that market.
What are the economic effects of a subsidy?
For domestic producers
consumers
allocation of resources
Government
Domestic producers supply a greater quantity of the good; the subsidy stimulates domestic production and employment in the protected industry.
More resources in that economy are attracted to the protected industry; this leads to reallocation of resources from other sectors of the economy where production and employment will fall.
Consumers pay a lower price and receive more goods because the subsidy shifts the supply curve sector to the right; however, consumers still pay indirectly for subsidies through higher taxes.
Subsidies impose direct costs on government budgets because they involve payments from the government to the producers of goods and services; this means governments have fewer resources to allocate to other priorities such as education and health care.
