Protectionism Flashcards
(10 cards)
What is a tariff?
tax on imports (ad valorem or specific)
What is a Quota?
A physical limit on the quantity of imports allowed
What is a Subsidy?
Payments by the government to reduce the costs of producers,
increase supply and reduce the price for consumers
What is a Non-Tariff Barrier? (NTB)
Barriers such as import quotas, tough environmental and product standard rules, trade embargoes and export subsidies
What are Rules of Origin?
Rules of the national source of the traded goods
- e.g. a minimum % for locally-sourced components
What are some NTB’s?
• Intellectual property laws
- such as patents and copyright protection
• Financial protectionism
– when a government instructs state-owned banks to give priority/cheaper loans to Intellectual property laws such as patents and copyright protection
• Technical barriers to trade
- including labelling rules and stringent sanitary standards. This raises product compliance costs for exporters
• Preferential state procurement policies
- where government favour local producers when finalising contracts for state spending projects
• Domestic subsidies
- aid for businesses facing financial problems
- for example, subsidies for car manufacturers or loss-making airlines.
• Financial protectionism
- when a government instructs state-owned banks to give priority/cheaper loans to domestic businesses
• Managed exchange rates
- government intervention in currency markets to change the relative prices of imports and exports domestic businesses
Reasons for Protectionism?
• Protecting domestic industries
- trade restrictions can shield domestic industries from foreign competition, preventing job losses and maintaining national self-
sufficiency in critical sectors.
• National security
- trade restrictions may be used to safeguard national security interests; export of certain technologies or goods could be restricted to prevent them from falling into the wrong hands.
• Diversify
- an economy that is too dependent on one product.
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Infant industry argument
governments may protect emerging or “infant” industries until they can compete internationally; tend to be temporary trade barriers, like
subsidies or tariffs, providing domestic industries time to grow
• Sunset industry argument
- use tariffs to slow the decline of older sectors and limit risks of structural unemployment.
• Anti-dumping measures
- duties are imposed when foreign companies sell products below their production cost in the domestic market, harming domestic producers protecting local industries from unfair competition.
• Environmental and health concerns
- restrictions prevent the import of products that do not meet domestic environmental, health, safety and quality standards.
• Balance of payments improvement
- trade restrictions can be used to improve a country’s balance of payments by reducing imports through tariffs or quotas can help
reduce trade deficits that use up foreign currency reserves
• Raise tax revenues
- this is especially important for many developing countries who
have a limited domestic tax base).
Problems with Protectionism?
• Higher prices for consumers
- protectionist policies often lead to higher prices for imported goods due to tariffs or quotas.
• Less choice for consumers
- trade restrictions can limit or prevent some goods being imported
• Lower living standards
- living standards may fall as the availability and affordability of goods decreases; many protectionist measures reduce welfare
• Over-reliance on protection - can lead to inefficiencies in supply, reducing competitiveness in the long term.
• Danger of retaliation/trade war
- protectionist policies may strain diplomatic relations and lead to retaliation by trading partners.
• Increase in income inequality
- if trade restrictions benefit specific industries or groups while imposing costs on others; they may also affect global income distribution by limiting opportunities for developing countries to export
• Shadow markets
- incentives to by-pass controls
Issues with Free-Trade?
• Job losses
- free trade can lead to job losses in industries where other countries have a comparative advantage; when cheaper imports flood the market, this can lead to layoffs and unemployment.
• Wage suppression
- free trade can lead to downward pressure on wages, as
companies might move production to countries with lower labour costs.
Income inequality
- free trade can exacerbate income inequality within countries
Benefits of Protectionism?
• Domestic industries become more competitive with better products for consumers
• Protects domestic industries and helps them grow; may create jobs
• Can protect jobs, prevent structural unemployment
• Governments can gain some tax revenue from tariffs
• Can be used to improve the current account balance on the Balance of Payments
• Can protect citizens from dangerous products, protect national security and help
promote self-sufficiency in strategic industries
