protectionism Flashcards
Define the term protectionism.
Protectionism is the theory or practice of shielding (or protecting) a country’s domestic industries from foreign competition by taxing imports, imposing quotas or passing laws
What are some reasons for protectionism?
It is human nature to want to protect what is ours
Protectionism is a government‘s actions to protect the businesses and interests of their own nation
Government is looking to protect what is theirs
Explain protection for domestic industries.
The main reason that a government will seek to put in place protectionist policies is to protect their domestic industries
For example the French government will seek to protect French industries so may place tariffs and quotas on imports of wine and cheese
This stops the French markets being flooded with cheap imports, which will affect the sales of the domestic businesses
What is a tariff?
A tariff is a tax placed on an import to increase its price and decrease its demand
Tax can be imposed by governments to raise revenue and to restrict imports
A tariff is likely to raise the final price to the consumer – therefore a fall in demand for the goods
Consumers will switch consumption to domestic goods
Explain the impact on a business of a tariff.
Imposing a tariff will help a country to:
Protect their fledgling (new) domestic industries from foreign competition
Protect their ageing and inefficient industries from foreign competition
However:
If a business faces having to pay stiff tariffs they may have to reduce production and this can mean job losses
What are the three reasons tariffs are imposed?
3 Protectionism
#1 To raise tax revenue Poorer countries may impose heavy tariffs on imports to raise much needed funds for healthcare and education
#2 For environmental reasons Tariffs are sometimes only placed on goods that have negative externalities e.g. cigarettes (sin tax)
What are some advantages of tariffs?
Domestic produced goods do not incur the tariff and so are likely to be cheaper
Tariff protection allows domestic businesses to sell more because they gain a price advantage compared to imports
Domestic producers gain price advantage
It can ensure better job security
It can raise important tax revenue for government which can be spent possibly on infrastructure
What are some disadvantages of tariffs.
Some products, even with tariff cost added, do not put off potential customers willing to pay for unique or unusual imported products
Tariffs may just increase the costs to consumers
Other countries may retaliate by imposing their own tariffs on imports
What is an import quota?
A quota is a physical limit on the quantity of goods imported or exported for example only 10,000 units a year
Imposing a limit on the quantity of goods that are imported will increase the share of the market available for domestic products (made in the home country)
New Zealand is allowed to import up to 230,000 tons of sheep and goat meat a year to the EU
Why are quotas imposed?
When an import quota is set, it allows a country to be sure of the amount of the good imported from the foreign country
When there is a tariff, if the supply curve of the foreign country is unknown, the quantity of the good imported may not be predictable, quotas are predictable because the actual amount is known
What are the uses of import quotas?
Import quotas are imposed to protect jobs of domestic producers
Import Quotas are also imposed as a bargaining chip to be used in negotiations on trade
Other uses for quotas are to protect strategic industries such as defence and agriculture. In market environments where imports are on the rise, quotas are more protective than tariffs.
What are the advantages of import quotas?
1 protects domestic industries e.g. USA calling for quotas on steel imports
What are the disadvantages of quotas?
When one country uses quotas, its trading partners do the same and the end result is less exporting opportunity for all producers and higher prices for all consumers.
Quotas are also complex for the country using them.
They require a lot of paperwork indicating exact amounts of products for each country facing a quota.
It is also difficult to measure the precise degree of protection quotas offer.
Explain using government legislation instead of quotas.
Sometimes a country will not be able to set tariffs or quotas because of trade agreements or membership of a trade bloc, this means they need to come up with other ways of protecting their domestic industries from floods of cheap imports
They can do this through legislation e.g. No fakes, safety of toys etc.
What are the advantages of government legislation?
Government legislation can be a very powerful tool in preventing fake imports into countries
For example any toys imported into the UK must have a CE mark
This indicates that the product conforms to EU safety regulations
The added benefit is it means customers can trust the products that they are buying are genuine
