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Protectionism
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Governments sometimes restrict trade to protect their own industries. These policies are called protectionism.
Reasons for protection
Prevent dumping (foreign firms selling below cost to win market share).
Protect employment in domestic industries.
Protect infant industries (new industries that need time to grow).
Raise revenue from tariffs.
Protect consumers from unsafe products.
Reduce a current account deficit.
Retaliation against another country's barriers.
Protect employment in domestic industries.
Protect infant industries (new industries that need time to grow).
Raise revenue from tariffs.
Protect consumers from unsafe products.
Reduce a current account deficit.
Retaliation against another country's barriers.
Methods
Tariffs: taxes on imports. They raise the price of imports, protect domestic producers and raise revenue, but consumers pay more and other countries may retaliate.
Quotas: limits on the quantity of a good that can be imported. Directly cut imports, but raise prices and raise no revenue.
Subsidies: government payments to domestic producers, lowering their costs so they can compete. Cost the government money.
Quotas: limits on the quantity of a good that can be imported. Directly cut imports, but raise prices and raise no revenue.
Subsidies: government payments to domestic producers, lowering their costs so they can compete. Cost the government money.
Diagrams
On a supply and demand diagram for a domestic market:
A tariff raises the price of imports, so the domestic price rises, domestic supply rises, quantity demanded falls and imports fall.
A quota restricts imports to a fixed amount, which raises the domestic price.
A subsidy shifts the domestic supply curve to the right, so domestic producers supply more at each price.
A tariff raises the price of imports, so the domestic price rises, domestic supply rises, quantity demanded falls and imports fall.
A quota restricts imports to a fixed amount, which raises the domestic price.
A subsidy shifts the domestic supply curve to the right, so domestic producers supply more at each price.
A tariff of 20% is placed on imported shoes priced at $50. What is the new price of the imported shoes?
- 20% of 50 = 10
- 50 + 10
Answer: $60
Reasons: dumping, jobs, infant industries, revenue, safety, current account, retaliation. Methods: tariffs (taxes on imports), quotas (quantity limits) and subsidies (payments to domestic firms). Each raises prices or costs somewhere.
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