4.1.4 protectionism

protectionism

• A policy of shielding domestic industries from foreign competition

• Achieved through:

  • Import taxes (tariffs)

  • Quotas

  • Regulations/laws

• Opposite of trade liberalisation — restricts rather than opens global trade

why does the government use protectionism

• Driven by national interest — instinct to protect domestic assets

• Aims to shield local businesses from foreign competition

• Achieved by restricting imports through tariffs, quotas, and regulations

• Opposite of protectionism: Trade liberalisation — opens markets and reduces barriers

what are tarrifs 

• A tax on imports to raise their price and reduce demand

• Used by governments to:

  • Raise revenue

  • Restrict foreign goods

• Leads to higher prices for consumers

• Encourages switch to domestic alternatives

tarrifs : impact on business 

Benefits:

• Protect new (fledgling) industries from foreign competition

• Shield inefficient or ageing sectors from collapse

Drawbacks:

• Higher costs for firms facing tariffs → may reduce production

• Can lead to job losses and lower competitiveness

3 reasons why tarrifs are imposed

1. Raise tax revenue

   • Especially in poorer countries to fund healthcare, education, infrastructure

2. Environmental protection

   • Tariffs on goods with negative externalities (e.g. cigarettes = sin tax)

3. Protectionism

• Shield domestic industries from foreign competition

benefits of tarrifs

• Domestic goods become cheaper (no tariff) → price advantage over imports

• Boosts sales for local businesses

• Enhances job security in protected industries

• Tariffs can be strategically reduced in trade deals to balance protection and openness

drawbacks on tarrifs

• Unique imports may still attract buyers despite higher prices

• Tariffs often lead to higher consumer costs

• Risk of retaliation — other countries may impose tariffs in response

what is an import quota

• A quota sets a physical limit on imports (e.g. max 10,000 units/year)

• Restricts foreign supply → increases market share for domestic producers

• A form of non-tariff protectionism — controls volume rather than price

why use import quotas ? 

• Quotas offer predictability — governments know exactly how much of a good will be imported

• Unlike tariffs (which depend on supply curves), quotas guarantee volume limits

• Helps governments control market exposure to foreign goods more precisely

benefits of import quotas

• Protect domestic jobs by limiting foreign competition

• Used as bargaining tools in trade negotiations

• Safeguard strategic industries (e.g. defence, agriculture)

• More effective than tariffs in rising import environments

drawbacks of import quotas

• Can trigger retaliation — other countries impose quotas too → fewer exports, higher prices

• Complex administration — requires detailed paperwork and tracking per country

• Hard to measure exact protection level — less transparent than tariffs

government legislation as protectionism

• When tariffs and quotas are restricted (e.g. due to trade bloc rules), governments use legislation

• Laws can:

  • Ban counterfeit goods

  • Enforce safety standards (e.g. toy safety)

• Acts as a non-tariff barrier to limit cheap imports and protect domestic industries

benefits of using legislation to restrict imports

• Prevents fake or unsafe imports

• Example: UK requires CE mark on imported toys → ensures EU safety compliance

• Builds consumer trust — buyers know products are genuine and regulated

• Acts as a non-tariff barrier when quotas/tariffs aren’t allowed (e.g. trade bloc rules)

drawbacks of using government legislation to restrict imports

• Not all imports can be checked — ~2% of UK imports are fake (OECD)

• Laws alone can’t stop counterfeit goods from entering

• Fake goods fund organised crime — affects sectors like medicine, machinery, clothing

• Global issue: fake imports worth nearly $0.5 trillion/year

subsidy

• A government payment to producers

• Keeps domestic prices low → protects against cheaper imports

• Boosts competitiveness of local goods without direct trade barriers

domestic subsidys 

• Governments give money to local producers

• Makes domestic goods cheaper → boosts competitiveness

• Artificially raises price of imports relative to subsidised local goods

• Reduces demand for foreign products without direct trade barriers

benefits of domestic subsidies

• Boosts production → creates jobs and increases tax revenue

• Gives first-mover advantage in emerging markets (e.g. BRICS, MINT)

• Enables economies of scale → lowers long-run average costs

drawbacks of domestic subsidies 

• Seen as protectionist → may trigger retaliation (e.g. tariffs/quotas on UK exports)

• Encourages inefficient business activity — firms may rely on subsidies to survive

• Can distort global markets and undermine fair competition