MACRO - Protectionism

Protectionism

Government impose trade barriers on international trade (USA) to limit imports & protect domestic production.

Reasons for protectionism

• Protect domestic producers

• Improve BOP

• Earn government revenue

• Protect infant (sectors that have just started) & sunset (sectors that have matured) industries

• Prevent goods w/ negative externalities being imported (cigarettes)

• Strategy to retaliate - When a country impose barriers on another’s products, they retaliate through protectionism

• Prevent dumping

Arguments against protectionism

• Limits consumer choice

• Higher prices - import inflation

• May result in domestic monopoly —> less foreign competition - less firms in market - market power increases - domestic monopolies

• Retaliation - if a country restricts imports - other countries act like spoiled rich kids and become petty

Protectionism policies

1. Tariffs - Tax on imports

   • Makes goods relatively expensive

     • However, if demand is inelastic people will still buy at higher prices (essential goods - petrol) - import inflation

2. Quotas - Physical limit on imports

   • Consumers would therefore, purchase locally

     • However, effectiveness depends on size of quota & governments assurance illegal purchases don’t happen.

3. Subsidies to local firms

4. Admin barriers - Rules & regulations set of importing goods to make it harder for foreign goods to enter the country

5. Voluntary export restrictions - Importing country requests exporting country to limit their export to said country

6. Devaluation of currency - imports more expensive - less demand - less imports

7. Sanctions (penalties/restrictions placed on a country) & embargos (complete ban on trade with a particular country)