4.1.4 Protectionism

Define Protectionism

Government seeks to protect domestic industries from foreign competition

Define tariff

Tax on imported goods from other countries

Benefits of tariffs

• Protect infant industries allows them to eventually becoming more competitive globally.

• Increased government tax revenue

• Reduces dumping by foreign businesses as they cannot sell below market price

Drawbacks 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

Define import quotas

Government imposed limit on the amount of a particular product allowed into the country

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

Drawbacks 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

Define government legislation

Governments can impose laws to restrict certain imports to protect customers and businesses, e.g. imports may need to be strict regulations in order to be allowed in the country

What are the benefits and drawbacks of government legislation?

+ Helps domestic firms grow with limited foreign competition.

- Can lead to retaliation from affected countries.

Define domestic subsidies

Payments are given to domestic businesses to help lower costs of production

What are the benefits and drawbacks of domestic 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

- Businesses may become inefficient, relying on government support

- Can cause trade disputes or retaliation from other countries