4.1.6

• protectionism are economic policies that restrict international trade in order to protect domestic firms from foreign competition
• protectionist policies aim to reduce imports - but some of them influence exports
• protectionism methods:

  • tariffs
  • quotas
  • subsidies
  • exchange rate manipulation
  • administrative barriers
• protectionism protects jobs - if there is a large increase in imports, international firms will be able to cut their prices as they are more competitive - leaving domestic firms to cut jobs
• infant industries are newly established industries
• infant industries don't have the economies of scale to compete globally - protectionism gives these firms a space to grow - to become internationally competitive without needing to compete with multinational businesses - once the firm gets large enough, barriers can be removed so the firm is now introduced to foreign competitors
• dumping is when foreign firms sell goods below their cost of production - often because of a surplus in supply - or wanting to drive other firms out - protectionism protects domestic firms from this unfair practice
• countries with high labour costs struggle to compete with foreign, low labour cost countries, who can sell at a lower price - protectionism needed to protect domestic firms
• countries that import a large share of global output face an upwards sloping supply curve - the more it buys, the higher price per unit
• protectionism can reduce import demand - reduce world prices - improving terms of trade. can increase national welfare if cost of imports aligns with cost to the economy
• using protectionism through tariffs can increase government revenue - used to fund public merit goods (education/healthcare)
• protectionsim restricts spending on imports which improves the current account
• tariff - tax on imported good
• tariffs cause consumer prices to increase - unless supplier absorbs the tax so prices can decrease
• higher prices from tariffs means domestic firms can be competitive with foreign markets who were able to charge low prices
• tariff diagram:

  • World supply is perfectly elastic as quantity supplied in a domestic market is too small to influence world price
  • Without tariff, domestic demand is greater than domestic supply so Q2-Q1 would be imported as a result of the excess demand
  • Higher prices from tariff increases domestic supply from Q1 to Q3 whilst demand falls from Q2 to Q4
  • Imports fall to Q4-Q3

  
• a quota is a physical control that limits the quantity of a good imported
• quotas protect domestic producers by reducing foreign competition, guarantees them a market share as foreign firms have limited access
• unlike tariffs, quotas don't generate government revenue, but they can raise the prices of goods due to its limited supply
• Quota diagram:

  • quantity of imports without quota: Q4-Q1
  • quota is set at Q2
  • quantity of imports falls between Q2-Q1 with quota
  • this creates excess demand between Q4 and Q2
  • higher price from quota means more domestic suppliers enter the market (due to price mechanism) - shifts domestic supply to Q3

  
• examples of quotas being used:

  • Japan's quotas on agricultural products
  • EU steel quotas
• subsidies are a grant given by the government to lower firms cost of production so they can produce more
• subsidies allow firms to be more competitive with cheaper prices
• types of subsidies: export subsidies and import reducing subsidies
• export subsidies help firms sell overseas at competitive prices
• import reducing subsidies lower production costs to replace imports with domestic goods
• examples of subsidies being used:

  • EU CAP (Common Agricultural Policy)
  • China steel subsidies
• non-tariff barriers are restrictions on trade that use regulations and administrative barriers to limit imports by increasing costs or causing delays