Protectionism (Edexcel A Level Business)

• Protectionism is when a government seeks to protect domestic industries from foreign competition
  
  
• A tariff is a tax placed on imported goods from other countries 
  • For example, tennis rackets imported into the UK from China have a tariff of 4.7%
    
    
• A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses

 

When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises

• American customers are more likely now to purchase American cheese as the tariff has now made British cheese more expensive
  
  
• The benefits of tariffs include
  • They protect infant industries so they can eventually become more competitive globally
  • An increase in government tax revenue 
  • Reduces dumping by foreign businesses as they cannot sell below the  market price 
    
    
• The disadvantages of tariffs include
  • Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers 
  • Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers 
  • Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

• An import quota is a government imposed limit on the amount of a particular product allowed into the country 
  • E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per year

The quota on rice imports from Cambodia to China helps to protect rice farmers in China

 

• Restricting the physical amount of imports means that domestic businesses face less competition and benefit from a higher market share
  • More of the domestic demand is now met by domestic producers 
     
• The benefits of import quotas include 
  • To meet extra the demand, domestic businesses may need to hire more workers which reduces unemployment and benefits the wider economy
  • The higher prices for the product may encourage new businesses to start up in the industry
  • Countries are able to easily change import quota as market conditions change
  • Foreign countries view a quota as less confrontational to their business interests than tariffs
    • Their exporters can still sell their goods at the higher price in domestic markets (but a limited amount)
       
• The disadvantages of import quotas include
  • Quotas limit the supply of a product and whenever supply is limited, the price of the product rises
  • They may generate tension in the relationship with trading partners
  • Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition

• Aside from tariffs and quotas, governments also choose to use legislation and subsidies to protect domestic businesses
   

The use of Government Legislation & Domestic Subsidies to Protect Domestic Industries

	Government Legislation	Domestic Subsidies
How does it work?	Governments can impose laws to restrict certain imports to protect customers and businesses Imports may need to meet strict regulations in order to be allowed into the country	Payments are given to domestic businesses to help lower costs of production
Example	There is a UK ban on imported chicken from the USA due to the practice there of using chlorine to wash chicken carcasses	Post Brexit, the UK Government is providing subsidies to its farmers in order to decrease their costs of production
Benefits	Allows domestic firms to grow as they have limited competition from businesses abroad	Reduced costs can lead to lower prices making domestic firms more competitive in international markets as their exports may be cheaper  Businesses remain competitive and this helps to protect jobs in the industry
Drawbacks	Can lead to retaliation from countries facing the legislation	Businesses may become inefficient as they know as they know their costs are being subsidised