Protectionism: Notes, Tariffs and Trade Barriers | Economics PDF

Protectionism Learning Objectives Protectionism Many governments and businesses might argue that free trade could benefit the global economy. However, some countries believe it is in their best interests to restrict trade. This is known as protectionism, where governments use trade barriers to pr...

Protectionism Learning Objectives Protectionism Many governments and businesses might argue that free trade could benefit the global economy. However, some countries believe it is in their best interests to restrict trade. This is known as protectionism, where governments use trade barriers to protect domestic industries from overseas competition or give financial help to domestic producers. Implementation of protectionism =============================== Preventing Dumping A government may use trade barriers if it believes an overseas firm is dumping goods, which means selling products below cost in a domestic market. This is considered unfair competition. For example, the US Commerce Department imposed tariffs on Chinese steel manufacturers suspected of dumping in 2016. Protecting Employment Trade barriers may be used if domestic industries are at risk of job losses due to foreign competition. For example, tariffs may be imposed to protect local manufacturers from cheaper imports. Protecting Infant Industries Infant industries are newly established businesses that may not yet be competitive on an international scale. Trade barriers can give these industries time to grow and become more efficient before facing foreign competition. Gaining Tariff Revenue A government can increase its revenue by imposing tariffs on imports. For example, in July 2018, India imposed tariffs on US imports to raise an estimated \$240 million. Preventing Harmful or Undesirable Goods Trade barriers may be used to prevent imports of harmful goods, such as the EU's ban on beef from cows treated with growth hormones. Reducing Current Account Deficits Countries with large trade deficits may impose barriers to reduce imports and increase exports to balance their trade accounts. Retaliation A country may impose tariffs in response to another country's trade barriers. For example, the US imposed tariffs on steel and aluminium in 2018, leading to retaliatory tariffs from China. National Security Some governments use trade barriers to protect industries essential for national security, such as energy or defence. Tariffs ======= Governments can use tariffs, which are taxes on imports, to make foreign goods more expensive and protect domestic industries. However, tariffs may be ineffective if demand is inelastic, as consumers might continue to buy the imported goods despite the higher price. Import Quotas An import quota sets a physical limit on the amount of a product that can be imported into a country. This helps protect domestic producers but can also raise prices due to reduced supply. Government Legislation Governments may impose strict regulations and standards on imported goods, making it harder for foreign businesses to sell in the domestic market. Domestic Subsidies Governments may provide financial support, such as grants or tax breaks, to domestic producers to make them more competitive against foreign imports. Impact of Protectionism on Businesses In the short term, protectionism can benefit domestic businesses by reducing competition, increasing sales, and boosting profits. However, in the long term, free trade is generally seen as more beneficial because it promotes efficiency, specialisation, and economic growth. Trade restrictions, while motivated by various factors, can prove ineffective. Retaliation from affected countries, potentially escalating into trade wars, is a significant risk. Tariffs may also fail if import demand is inelastic, resulting in minimal impact despite price increases. Despite other options, tariffs are preferred by many countries as a more efficient means of limiting imports while supporting domestic producers and fostering competition..