Protectionism

Definitions:

• Protectionism: the approach used by governments to protect domestic producers

• Trade barriers: measures designed to restrict imports

• Dumping: where an overseas firm sells large quantities of a product below cost in the domestic market

• Infant industries: new industries yet to establish themselves

• retaliate: to take action against someone who has done something bad to you

Reasons for protectionism:

1. Preventing dumping

   • where foreign producers sell goods below cost in a domestic market

   • to destroy their overseas competitors

2. Protecting employment

   • trade barriers are used if domestic industries need protection from overseas competitors to save jobs

3. Protecting infant industries (剛起步)

   • protected from strong overseas rivals until they can grow, become competitive, and exploit economies of scale

4. Gain tariff revenue (關稅收入）

   • impose tariffs on exports

   • the money imposed from exports can be spent on government services to improve living standards

5. Preventing the entry of harmful or unwanted goods

   • use protectionism if government felt that overseas producers are trying to sell goods that are harmful or unwanted goods

   • use barriers

6. Reduce current deficits

   • use trade barriers

   • when account deficit gets out of control

   • government try to reduce important and increase exports at the same time to reduce the deficit

7. Retaliation (報復)

   • when a country dumps large quantities of food below cost, a government may feel obliged to retaliate by imposing heavy taxes on those goods when they come into their country

   • can result in a trade war

   • negative impact on both nations

Methods for protection

1. tariffs

   • makes imports more expensive (impose special tax on the goods)

   • reduce demand for imports and increase demand for goods produced at home

   • protect domestic industries

   • improve current account

   • rause revenue for the government

   • if the tariff is too high, it will end the imports and the government revenue will be zero

   • raise the price of products in the short term → Consumers won’t benefit

2. quotas

   • physical limit on the number of goods allowed into the county → producers face less threat

   • more market for domestic

   • raise prices of goods because fewer cheaper imports are available

   • increased demand for goods → protect employment

   • increase the supply of domestic producers

   • consumers choice restricted

   • domestic producers might be overprotected and fail to improve efficiency

3. Subsidies

   • given to domestic producers (giving financial support such as grants or tax breaks)

   • lower prices for consumers → low production cost and increased supply

   • easier for domestic markets to break into foreign markets

   • domestic producers will be encouraged to enter a foreign market

   • boost exports, employment and improve current account

   • costs government money → high opportunity cost