Unit 6.2 - Protectionism

• Protectionism


  When government seeks to protect domestic industries from foreign competition, by restricting free trade

  
• Tools of protection


  • Tariffs
  • Quotas
  • Export subsidies
  • Embargoes
  • Voluntary export restraints
  • Excessive administrative burdens
  • Exchange control

  
• Tariffs


  • Import tariffs
  • Export tariffs
• Tariffs


  • To raise revenue, especially if price inelastic
  • To ensure adequate domestic supply
  • Protects exploitation of natural resources
  • To discourage consumption of imports
  • To raise tax revenue
  • Imposes an extra cost on the supplier - this increase the price
• Specific tariff


  A tax on imports or exports
• Ad valorem tariff


  A tax on imports or exports
• Quotas


  Limits on the quantity of imports
• Export subsidies


  • Can be given to exporters and to domestic firms that compete with importers
  • Decreases a firm's costs - encourages increased output and a lower price
  • Negatively affects foreign firms and domestic taxpayers
• Embargoes


  A complete ban on imports of a particular product or on trade with a particular country
• Voluntary export restraints


  An agreement by an exporting country to restrict the amount of a product that it sells to the importing country
• Excessive administrative burdens


  Lengthy forms / administration, artificially high product standards that restrict consumer choice
• Exchange control


  Limits on the amount of foreign exchange that may be purchased in order to buy imports, travel abroad or invest abroad
• Arguments for protectionism


  • Protect essential industries
  • Infant industries
  • Declining industries
  • Strategic industries
  • Prevent dumping
  • Imposing restrictions on countries where wages are very low
  • Improve terms of trade
  • Improve balance of trade
  • Protect cheap labour
• Reasons against protectionism


  • Reduce potential growth of infant industries
  • Prevent countries from specialising in the products in which they have a comparative advantage
  • Reduce international competition - increases prices and lowers quality
  • Reduces consumer choice
  • Lowers the size of the market and ability to take advantage of economies of scale
  • Reduced choice of raw materials and capital goods - increased cost of production
  • Results in trade war - tariffs causing price increases