4.14 Protectionism

• Protectionism is when a government seeks to protect domestic industries from foreign competition
• A tariff is a tax placed on imported goods from other countries
• A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses.
• Benefits of tariffs

  • They protect infant industries so they can eventually become more competitive globally.
  • An increase in government tax revenue .
  • Reduces dumping by foreign businesses as they cannot sell below the market price .
• Disadvantages of tariffs

  • Increases cost of imported raw materials - may affect businesses who use goods for production, leading to higher prices for consumers.
  • Reduces competition for domestic firms - may become more inefficient & produce poor quality products for their customers.
  • Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them.
• What is an import quota

  import quota is a government imposed limit on the amount of a particular product allowed into the country.
• Restricting the physical amount of imports means that domestic businesses face less competition and benefit from a higher market share

  More of the domestic demand is now met by domestic producers
• Benefit of import quotas

  • To meet extra the demand, domestic businesses may need to hire more workers which reduces unemployment and benefits the wider economy.
  • The higher prices for the product may encourage new businesses to start up in the industry.
  • Countries are able to easily change import quota as market conditions change.
  • Foreign countries view a quota as less confrontational to their business interests than tariffs.
• Drawbacks of import quotas

  • Quotas limit the supply of a product and whenever supply is limited, the price of the product rises.
  • They may generate tension in the relationship with trading partners.
  • Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition.
• Government legislation (trade barrier)

  • impose laws to restrict certain imports to protect customers and businesses.
  • Imports may need to meet strict regulations in order to be allowed into the country.
• Benefit of gvt legislation

  • Allows domestic firms to grow as they have limited competition from businesses abroad
• Drawback of gvt legislation

  • Can lead to retaliation from countries facing the legislation
• Domestic subsidies (trade barrier)

  • Payments are given to domestic businesses to help lower costs of production.
• Advantages of domestic subsidies

  • Reduced costs = lower prices making domestic firms more competitive in international markets as their exports may be cheaper.
  • Businesses remain competitive - helps to protect jobs in the industry.
• Drawback of domestic subsidies

  • Businesses may become inefficient as they know their costs are being subsidised.