4.1.4 Protectionism

Protectionism

An approach used by government to protect domestic businesses. 4 main methods: tariffs, quotas, laws, subsidies.

Reasons for protectionism

Protect jobs, protect infant industries, prevent dumping (a country has excess stock and sells it to other markets at incredibly low prices), raise tax revenue, prevent entry of harmful or undesirable goods, improve the balance of payments (exports = good).

Tariff

A tax on imports. Protects domestic businesses from foreign competition. If imports are still purchased, can raise tax revenue.

Quota

A limit on how many units can be imported, by volume or value.

Laws/regulations

Laws/rules businesses must comply with.

Subsidy

Financial gift given to firms that doesn’t have to be repaid.

Drawbacks of protectionism

Risks of retaliation. Less innovation as there is less competition. Not exploiting comparative advantage.