4.1.4 Protectionism

• Protectionism 


  when a government seeks to protect domestic industries from foreign competition
• tariff


   tax placed on imported goods from other countries 
• What is the purpose of a tariff?


  increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses
• What are the 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 
• What are the disadvantages of tariffs?


  • Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers

  
  

  • Reduces competition for domestic firms who may become more inefficient and 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
• import quota


  It's a government imposed limit on the amount of a particular product allowed into the country 
• What do import quotas do?


  • 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 
• The benefits 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 -Their exporters can still sell their goods at the higher price in domestic markets (but a limited amount)
• disadvantages 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


  • Government can impose laws to restrict certain imports to protect customers and business

  • Imports may need to meet strict regulations in order to be allowed into the country.
• Benefits of Government Legislation


  Allows domestic firms to grow as they have limited competition from businesses abroad.
• Drawbacks of Government Legislation

  Can lead to retaliation from countries facing legislation
• Domestic subsidies


  Payments are given to domestic businesses to help lower costs of product
• Benefits of subsidies


  • reduced costs can lead to lower prices making domestic firms more competitive in international markets as their exports may be cheaper 

  • Businesses remain competitive and this helps to protect jobs in the industry
• Drawbacks of subsidies


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