4.1.1: Protectionism

protectionism

• restriction of trade

• protect domestic producers from overseas competition or to give financial help to exporters

• reasons for protectionism:

  1. preventing dumping:

     • foreign producers sell goods below cost in a domestic market

     • unfair competition for domestic producers

  2. protecting employment:

     • domestic industries needing protection from overseas competitors

     • jobs lost due to cheap imports

  3. protecting infant industries:

     • new unestablished industries

     • should be protected from strong overseas rivals

  4. to gain tariff revenue:

     • raises revenue by imposing tariffs

     • spent on government services to improve living standards

  5. preventing the entry of harmful or undesirable goods:

     • administrative barriers

  6. reduce current account deficits:

     • increased exports

     • reduced imports

  7. retaliation:

     • against dumping

     • heavy taxation

     • trade war

  8. national security:

     • threat to a nation of being over-dependent on trade

tariffs

• making imports more expensive

  • reduced demand for imports

• increased demand for locally produced products

• raise government revenue

• limited impact if demand is price inelastic

  • demand will not fall in relation to price increase

  • fall in demand < price increase

import quotas

• physical limit on amount of imports allowed

• restricted qty = less threat to domestic producers

• raise prices

• fewer cheaper imports

• embargo

  • imports completely banned from a country

  • political reasons

• demand met by domestic producers

  • protect and increase employment

• help prevent either goods from overpowering the market

• improved consumer choice

government legislation

• insisting imported goods meet strict regulations and specifications

• legislation passed to prevent entry

• administrative barriers

• protection of consumers from harm

domestic subsidies

• financial support to exporters or domestic producers facing strong competition

  • grants, interest free loans, tax breaks

• lower price for consumers

  • reduced production cost

  • increased supply

• lower equilibrium price

• easier for home businesses to break into foreign markets

• break free trade agreements

impact of protectionism on businesses

• short term

  • benefits domestic businesses

    • reduced competition

    • high price of imports = easy to compete

    • increased sales volume, revenues and profits

    • improved efficiency and competitiveness

    • fill gap in demand

• long term

  • businesses benefit from free trade

  • may harm businesses

  • encourages competition

    • motivation to improve efficiency

      • larger market share

  • increased specialisation

    • efficient goods

    • lower opportunity cost

    • raised level of output = higher sales, more profit

• attracts retaliation from overseas governments

• trade war