Protectionism

This is an approach a government takes to protect its own industries by limiting imports, switching demand to domestic firms to keep them trading.

Excessive restrictions are often frowned upon by the World Trade Organistion.

Types of Protectionism

Tariffs

What it is: A tariff is a tax on imports which the government imposes, which increases their price to the domestic consumer. The government successfully goads the consumer to boost domestic firms revenues whilst picking up extra tax reciepts.

Real world tariffs: It is normal, however, for countries to have these, often up to 5% mark up, but Cameroon has a 60% tariff(as of 2006, book I read, which is an obvious example of their extreme and often corrupt government)!

Tariffs can cause a loss in consumer surplus, and allows inefficient firms to enter a market. Also causes less to be traded worldwide, a deadweight welfare loss.

Illustrating the diagram: Lets call this the market for steel in the UK. The world can supply with perfect elasticity due to the sheer volume it trades. As their costs are cheaper, most world supply is chaper than domestic supply could be, so the consumer buys little steel from domestic firms.

If the government wants to protect UK steel, it will tariff imported steel so that import price is higher (S-tariff, shifted up). Now, we can see more domestic firms can now compete with the more expensive imports(mpore S-domestic). Domestic producers are ‘protected’.

Quotas

What is a quota? Here, the government restricts the amount of imports into a countries, by setting a maximum number that can be imported per year. On market prices faced, it has the same effect as a tariff, less traded at a higher price.

How it protects domestic firms: Instead of the government artificially marking up the price of imports as in a tariff,, it is left to the market mechanism through making the product scarce increasing the price. More expensive world supply means more home firms can compete again. Quotas can range whatever size.

On A Diagram: It works the same way as the diagram on tariffs above, the diagram would be exactly the same if the quota was distance DE. The distance between the demand curve and the domestic supply curve is fixed, being world supply, having the same effect on price.

Embargoes

Embargoes are complete bans on trade, be it for a certain good, or imports from a certain country. The latter only tends to occur when countries are at war, for which it is illegal to trade withy the enemy.

Subsidies

The government can choose to protect it’s domestic industries by subsidising production, so that the firm can lower prices whilst keeping it’s workers. It can now compete with lower cost overseas industries on price, allowing the citizens a voluntary choice to import if they wish.

Subsidies on Supply and Demand

Subsidising home industries means that firms can supply the same as before at a lower price, and remain trading. The domestic supply curve shifts downwards. When we factor in a flat world supply curve, more home firms than before compete with overseas for consumers.

Criticisms of protecting from imports

Inefficiency: Due to an artificial mark up, inefficient firms who would not otherwise be in the market are trading. It does not encourage us to make what we do best, as if our consumers would rather buy certain goods from overseas than here, than they are obviously better than us at making those goods, and we are not maximising output and incomes with the rescources we have.

Loss in Consumer Surplus: It can be seen that consumers do not benefit from it either, as the prices of imports rise, causing also home produced goods to rise aswell as home firms often have to buy imports somewhere along the way to make what they make.

Loss In Export Demand and International Tensions. By restricting imports, we are restricting overseas firms from an export market, meaning that economies such as China, and any other economy which specialises are less willing and able to consume our exports.

Less able as much demand for their produce is restricted, reducing their incomes and consumption. Less willing due to political tensions it could create.

Benefits of Protectionism

No…not that type of protectionism…….

Self Sufficiency: If we rely less on other economies, it becomes clear that our economy can produce everything domestic consumers need. In this case, we have little reliance on matters which are out of our own hands, and we become in control of our own fate.

Diversifying Risk: If an economy specialises, which it needs to with open barriers, then it puts it’s economy at risk of severe recession if demand or productive capacity collapses. Allowing other industries into a market avoids this risk.

More Stability When an economy is insulated from the rest of the world, it will not be susceptible to bouts of cost push inflation on imports. There will be no surge in structural unemployment because overseas can produce it better. GDP and inflation are likely to be much more stable.

Exploitation is Avoided. The economies which begin to specialise and open their barriers are likely to do this for development, implying they are less developed. Dependency and Strategic Trade theory suggests that any benefits of comparative advantage of such an economy may be eroded by unfair trade terms, which can result from an increasing reliance on imports and overseas demand.

When Do We Use Protectionism?

Mercantalism

This was the Economic thought of the UK from the 16th-18th century when the path to a nations wealth was believed to be a large holding of gold and other commodities, net exporting and barriers to import. The protectionist policies and colonisation of economies which could produce what the UK itself could not ensured that the British Empire would be a net exporter. Such a policy was the Corn Laws, an embargo on corn.

Mercantalism was debunked from policy in the 19th century after the writings of David Ricardo and comparative advantage showing that international trade with specialisation, rather than protectionism results in a higher level of incomes for citizens.

Trade Unionism

Protectionist policies have recently been adopted in response to pressure from domestic workers in primary and secondary sectors. With outsourcing to low cost labour economies, governments in the US and UK has also seen it necessary to protect workers from becoming unemployed, at the expense of a lower level of aggregate output. Examples include

  1. Steel tariffs during the Bush administration
  2. The Common Agricultural Policy of the EU
  3. Subsidies to General Motors

A Reflationary Policy

During times of economic downturn, the government may to attempt to keep spending within the economy and preserve jobs. Limiting outflows by importing and preserving external demand is a short term aggregate demand stabiliser. This is usually used as a last resort measure which was followed during the great depression.

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