Protectionism
Business: BTEC Level 3 National Extended Diploma, topic 4.3.3
Methods of Protectionism
Protectionism involves protecting a country's domestic industries, companies and jobs from foreign competition. Protectionism could take the form of tariffs, quotas or other barriers to trade.
Tariffs
- Tariffs are a tax imposed on a product when it is imported into a country, which increases the price of imports to reduce the competitiveness of the goods (promoting domestic goods and services in the process).
- Tariffs raise tax revenue for the importing country. These funds could even be used to subsidise domestic firms.
- Tariffs will probably increase the price of goods faced by domestic consumers.
Import quotas
- Quotas restrict the actual quantity of good imported.
- There can be a 'cap' on the number of goods which can be imported, reducing foreign supply.
- Quotas allow governments to have exact control over the quantity of goods imported but don't raise any tax revenue.
- Quotas will probably increase the price of goods faced by domestic consumers.
Non-tariff barriers
- Non-tariff barriers to trade can include import bans, rules of origin (e.g. having to prove a product did not come from a conflict zone), quality conditions imposed by the importing country on the exporting countries etc.
- Exchange rate manipulation: A government / central bank may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. This will give its exports a price advantage abroad.
Subsidies to domestic producers
- Governments can give subsidies to domestic producers to help them to compete against other providers internationally.
- The EU limits the subsidies that nations are allowed to implement under 'EU State Aid' rules.
- A subsidy would reduce a firms' costs and make them more price competitive internationally.
Test yourself on Protectionism
Which of the following is an example of protectionist policy?
Which of the following are effects of a tariff?