protectionism meaning
means giving preference to domestic producers by making it harder for foreign companies to export to your country
what is the goal of protectionism
increasing the amount exported and/or decreasing the amount imported, opposite of free trade.
how is protectionism carried out
usually features the use of trade barriers to make it harder for foreign firms to import their goods. 3 ways:
- tariffs
- quotas
- legislation and regulation
what are tariffs and how does it work
a tax imposed on an imported product to allow it to enter a country.
It will reduce the amount imported as it reduces their ability to competes domestically by pushing up their prices
what are the two main scenarios which governments tend to use tariffs
- to protect declining industry
- to protect infant industries
benefits of tariffs
- they will help firms to survive and protect jobs of firms whose rivals are being taxed
- tariffs indirectly protect other businesses that rely on these firms for trade: suppliers and local firms that would suffer if unemployment rose
- tariffs raise tax revenues, allowing governments to increase spending on public services
drawbacks of tariffs
- as it pushes up prices, it reduces consumers ability to buy the product (potentially reducing standard of living)
- tariffs help inefficient firms to survive, potentially harming competitiveness. they are more likely to improve in what they do if the tariffs wasn’t there
import quotas
a physical limit on the volume of a product that can be imported in a year. Once the quota is used, only domestically produced goods will be available
what are quotas designed to encourage domestic firms to do
increase the amount they are willing to supply as imports may endure price increase from the limited import amount.
benefits of quotas
- domestic firms face less competition, improving competitiveness. Also this improves profit for shareholders and job security for workers
- preventing unemployment theoretically reduces government spending on benefits
drawbacks of quotas
- no extra tax revenue is gained by the government
- they push up prices domestically for consumers
government legislation
if a government imposes new, stronger standards for safety or emissions in certain industries, importers may find that their products are illegal, meaning the firm will have to undergo a design change, taking a significant amount of time before importing can resume.
these issues are less likely to occur in trading blocs with harmonisation of laws.
what are domestic subsidies
these are protectionist measure that looks to actively supporting domestic firms rather than making importing harder.
what is a subsidy
a payment made by government to a business producing a certain product or located in a particular area that the government wishes to support
how do subsidies work for domestic businesses
they can reduce the unit costs by the amount of the subsidy, therefore boosting profit margins or allowing companies to cut their selling price. Protecting jobs and domestic supply of that product.
what is another consequence of government subsidies in relation to exports
it makes it easier to export these domestic products as with lower selling price they can be more price competitive in foreign markets
benefits of paying subsidies
- they stimulate demand and allow struggling firms to to boost orders, allowing investment in more efficient production
- subsidies have positive effect on balance of payments by reducing imports and boosting exports from firms receiving subsidy
drawbacks of paying subsidies
- artificially inflating profit margins of inefficient businesses prevents them from improving their efficiency
- subsidies will cause governments to increase taxation, basically punishing firms where subsidies aren’t provided
