2) Quotas.
A quota is a direct restriction on the quantity of imports. Domestic consumers must buy more of the good from domestic firms.
3) Subsidies.
An economy could subsidize its firms, domestic firms’ costs fall, domestic firms can charge lower prices and compete against foreign rivals.
4) Health and Safety Laws.
An economy could impose health and safety laws on imports to increase foreign rivals’ costs and prices.
5) Embargo.
An economy could completely stop trading with another economy maybe for political reasons. Free trade refers to international trade conducted without any restrictions on trade (i.e. no tariffs or quotas).
Protectionism refers to a country imposing trade barriers to restrict imports.
Reasons for Protectionism:
1) Infant Industry.
An infant industry is new, it needs time to grow and become efficient to be able to compete internationally. So the infant industry must initially be protected from foreign competition. After the infant industry has grown, created a brand and benefited from economies of scale, protectionism can be dropped because the industry can compete internationally. An infant industry such as shipbuilding must initially be protected until it becomes efficient.
2) Key Industries/National Security.
A certain industry like agriculture may be protected for self-sufficiency. Also, a country may protect industries key to its national defence (military equipment and energy) because it does not want to become dependent on, and vulnerable to, other countries.
3) Domestic Employment.
An economy could use protectionism to stop its consumers importing certain goods and instead buy them from domestic firms, increasing domestic employment.
4) Dumping.
Dumping occurs when country A sells its goods in country B below the cost of production. Cheap imports flood B’s economy and B’s firms go bust because they cannot compete against this unfair competition. A country may be dumping to destroy foreign competition or simply because it subsidized its exports and produced too much and wishes to release its excess of goods.
5) Cheap Labour.
Country A’s rivals may have lower wages and thus can produce cheaper and outcompete A’s domestic firms. A could use protectionism to increase its import prices so that its domestic firms can compete on a level playing field.
Many different types of protectionism exist:
1) Tariffs.
2) Quotas.
A quota is a direct restriction on the quantity of imports. Domestic consumers must buy more of the good from domestic firms.
3) Subsidies.
An economy could subsidize its firms, domestic firms’ costs fall, domestic firms can charge lower prices and compete against foreign rivals.
4) Health and Safety Laws.
An economy could impose health and safety laws on imports to increase foreign rivals’ costs and prices.
5) Embargo.
An economy could completely stop trading with another economy maybe for political reasons.
Effects of Protectionism on Resource Allocation Protectionism has many negative consequences for resource allocation: – Resources are allocated inefficiently, there is a welfare loss because resources do not match each country’s comparative advantage, so world output falls. – Protectionism means higher prices for domestic consumers so consumer surplus falls and living standards fall. – If a country protects one of its industries from foreign competition, that industry faces less competition and may become X-inefficient and waste resources. – Trade wars could occur. If country A places tariffs on its imports then other countries could retaliate and do the same. A then retaliates by increasing its tariff and the war escalates.