Protection

Question 1

* reasons for protection

Protecting infant industries -
for and against

Answer 1

Infant industries = new industries face difficulties and risks when setting up and start out on a small scale with high costs per unit.

FOR:
➣ Shielded from competitors short term to build capacity, gain market share, achieve economies of scale enabling them to compete in global economy

AGAINST:
➣ If protection policies aren’t removed, no incentive for industry to reach a level
of efficiency that can compete with foreign market (develop reliance on government)
➣ Government provides temporary assistance only in industries that have a chance of achieving a higher comparative advantage long term

Question 2

* reasons for protection

Protecting domestic employment for and against

Answer 2

FOR:
➣ Protection mechanisms put in place Demand for local goods will rise, as
domestic supply of products expands, more employment opportunities will occur

AGAINST:
➣ Distorts the allocation of resources ➞ labour and skills directed away from areas of more efficient production to areas less efficient production and lower growth rates in long term
➣ Other countries retaliate slower export growth

Question 3

* reason for protection

Protecting industries against dumping

Answer 3

Dumping = foreign goods sold at drastically lower price in the domestic market - unable to compete

FOR:
➣ Protection to prevent collapse of both efficient and inefficient industries = prevent
unemployment
➣ Prevent loss in productive capacity (potential output of economy)

AGAINST:
➣ Used to dispose large production of surpluses or to establish market position
➣ Short term lower prices for domestic consumers, however prices usually increased once local competition is eliminated

By 2021, over 4000 anti-dumping measures legally in force mainly for chemicals, plastics, resin, rubber (China has most dumping claims made against them)

Question 4

* reasons for protection

Protecting using defence - for and against

Answer 4

Defence = Retain certain industries to become more self sufficient during times when they require protections and security

FOR:
➣ Protect themselves in situations of conflict
E.g Japan highly inefficient in producing food, however retains high tariffs on rice imports to retain its own food supply

AGAINST:
➣ Higher costs in producing domestically vs sourcing from foreign economies
with comparative advantages

Question 5

* methods of protection and effects

Tarrifs - advantages and disadvantages

Answer 5

Tarrifs = Government imposed tax on imports

ADVANTAGES:
➣ Protecting domestic industries, and raise prices of foreign products relative to domestic products making domestic producers more competitive
➣ Domestic producers supply a greater
quantity = boosts domestic production and
employment
➣ Government earns revenue

DISADVANTAGES:
➣ More domestic resources are attracted to the protected industry. This leads to a
reallocation of resources towards inefficent producers
➣ Consumers pay a higher price and receive fewer goods. This redistributes income
away from consumers to domestic producers

Question 6

* methods of protection and effects

Subsidy - advantages and disadvantages

Answer 6

Subsidy = financial assistance given to domestic producers

ADVANTAGES:
➣ Domestic producers can reduce their selling price and compete more easily with overseas producers
➣ Domestic producers supply a greater quantity of the good. Therefore, the subsidy
stimulates domestic production and employment in the protected industry
➣ Consumers pay lower pricers and receive more goods (supply curve shifts to right)

DISADVANTAGES:
➣ Subsidies impose direct costs on government budgets ➞ governments have fewer resources to allocate to other priorities such as education and health care
➣Misallocation of resources towards protected industry ➞ production and employment falling in other sectors

Question 7

* methods of protection and effects

Quotas - advantages and disadvantages

Answer 7

Quota = refers to the restriction on the amount or values of various kinds of goods that may be imported

ADVANTAGES:
➣ After quota imposed, shortage of foreign goods so domestic producers raise prices ➞ increasing domestic supply, therefore stimulating domestic production and employment

DISADVANTAGES:
➣ Misallocation of resources towards protected industry ➞ production and employment falling in other sectors
➣ Invite retaliation from country whose exports have been reduced ➞ lower exports for country that initiated the quota

Question 8

* methods of protection and effects

Local content rules effect on international operating firms

Answer 8

Local content rule = government regulations that specify goods must contain a minimum percentage of locally made parts

➣ in return, imported components may not attract a tarrif

**Effect for international operating firms: ** Increased production costs, coordination inefficiencies in global supply chain (potentially lower quality products for consumers)

French naval group secured a $50 billion Australian submarine contract, agreeing to manufacture some parts in Australia despite higher costs than Japanese competitors.

Question 9

* methods of protection and effects

Export incentives

Answer 9

Export incentives = domestic producer assistance such as grants, loans or technical advice and encourages them to penetrate global markets or expand market share

➣ Become more popular ➞ greater focus on capturing foreign markets vs protecting import competing businesses

DISADVANTAGE = government funds directed away from other priorities + misallocation of resources

*Export Market Development Grant (EMDG) has assisted over 51,000 businesses in promoting and marketing their exports.
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