4.1.4 Protectionism

• Protectionism is the practice or theory of shielding a country’s domestic industries from foreign competition by taxing imports, imposing quotas and passing laws
• Reasons for protectionism are to protect domestic industries and to stop markets from being filled with cheap imports, affecting sales of domestic businesses
• Tariffs are taxes placed on imports to decrease demand, imposed by governments. Businesses raise the prices of these goods, often causing a fall in demand as customers switch to domestic goods. This protects domestic businesses from foreign competition. As a result, businesses importing goods may have to cut jobs to pay tariffs, causing job loss
• Reasons that tariffs are imposed are:

  • To raise tax revenue required for healthcare and education
  • For environmental reasons, causing negative externalities through sales of items like cigarettes
  • Protectionism - to protect domestic businesses
• The advantages of tariffs are:

  • Domestic goods are cheaper
  • More sales for domestic businesses from price advantages
  • Job security
  • Raises tax revenue for infrastructure, education or healthcare
• The disadvantages of tariffs are:

  • Some goods have inelastic demand and aren’t affected by raising prices
  • Other countries may retaliate, imposing their own tariffs on imports
• Import quotas are physical limits on goods imported or exported (for example, 100,000 units per year)
• Advantages of quotas are:

  • Increase market share for domestic products
  • Predictable - have a set amount, instead of unpredictable supply curve of tariffs
  • Safeguards jobs in domestic industries
• The disadvantages of quotas are:

  • Less exporting opportunity for all producers and higher prices for all consumers as trading partners use quotas too
  • Complex and involve lots of paperwork
  • Difficult to measure precise effect
• Trade barriers include:

  • Tariffs
  • Quotas
  • Government legislation
  • Domestic subsidies
• Government legislation can be used if tariffs and quotas can’t be set because of trade agreements (e.g. part of a trade bloc) and a country needs another way of protecting domestic industries.
• An advantage of government legislation is that it prevents fake imports.
• A disadvantage of government legislation is that not every import can be checked, and a country can’t prevent all fakes from coming in. Profits often go towards organised crime. This can be in any sector, including medicine, machinery and clothing
• Domestic subsidies are money given to local producers to make goods cheaper on domestic markets. This artificially raises the price of foreign goods relative to domestic goods, reducing demand and protecting domestic markets.
• The advantages of domestic subsidies are:

  • Encourages production, job creation and the tax paid back to the government.
  • Gives domestic producers first mover advantage when exporting to emerging markets
  • Domestic businesses gain economies of scale from extra production
• The disadvantages of domestic subsidies are:

  • Form of protectionism - may cause retaliation from other nations
  • Encourages business activity that could be inefficient or unprofitable without help from the government