Trade Protection

Protectionism

Protectionism, or trade protectionism, is the opposite of a free trade economy.
The government applies various policies to protect local firms from competition with international firms.

Government intervention aiming to limit imports or encourage exports by setting up trade barriers that protect from foreign competition.

A tax placed on imported goods.
This raises the price of imported goods, making them less desirable to consumers.

A physical limit on the number of value of goods that are allowed to be imported

Money is given to domestic producers to increase competition and reduce domestic price

Tariffs can cause various effects on imported goods:
- reduced quantity of imported goods
- increased quantity consumed of domestic goods

Tariffs are used to reduce imports in a situation where the domestic price equilibrium is higher than the world price.
It causes the world price to shift upwards, reducing the amount of imports as the world price approaches the domestic price.

Governments will also consider the elasticity and availability of goods that they put a tariff on.

Any tariff on a good with elastic demand generates large change in quantity demanded and encourages consumers to switch to domestic producers they offer a readily available substitute.
Tariffs are more effective with elastic goods.

Due to lack of available substitutes from domestic producers, tariffs on inelastic goods are not effective.
When tariffs are applied, the winners are domestic producers and the government.
The losers are consumers, foreign producers and society as a whole.

A quota diagram creates a second domestic supply curve, leading to a reduction in imports.
Consider a free trade diagram:
- Suppliers supply until they meet the world price.
- After that the gap is filled with import.
- The quota limits the amount of imports, so once foreign producers reach the quota, domestic suppliers take over once again.
- This is shown as a curve parallel to the domestic supply curve that starts from the world price and the quantity of the quota + domestic supply.
- There is a new price where the supply of domestic firms after the quota meets the demand curve.

Subsidies can be applied to markets to make lower their price and reduce the need for imports.
The subsidy works like that of a microeconomics supply/demand graph, shifting domestic supply to the right.
They come with the benefits and downsides of subsidies we're already used to, such as complacency.

Countries may choose to establish bureaucratic barriers preventing or disincentivizing foreign producers from importing goods or services.
These barriers include:
- Product Standards
- Health and safety regulations
- Voluntary Export Restraint Agreement
- Agreement between two countries to limit the amount of exports/imports.
- "Buy National" Policies
- A marketing campaign to encourage domestic consumers to support local, domestic firms.

All forms of protectionism result in some sort of reduction in total welfare, leading to a negative outcome for society as a whole.
In fact it is due to this reason that protectionism isn't often used as a tool to improve a nation's economy.
- Instead it is more often used to control political relations, prevent malpractice and protect sectors in need.

Protection of infant (sunrise) industries
- Especially developing economies might choose to protect certain industries so it can be built up for some time.
- Later on the protection is dropped so that the industry can compete normally.

National security
- Protecting industries relating to national security, such as military.
- Having these industries be local means they are safe from sabotage and more secure, for example.

Health and safety
- Protecting industries so that they meet health and safety standards which might not be met by imported goods.

Environmental standards
- Protecting certain industries so that they meet required environmental standards.

Anti-dumping
- Dumping is selling below cost price, which can be harmful for an economy.
- Protectionism can be used to prevent this by blocking imported goods.

Unfair competition
- Protectionism such as tariffs can be used to create fair competition between local goods and imported goods which might have benefits such as lots of subsidies.

Balance of payments correction
- Protectionism can be used to balance inflow and outflow so that an economy's currency is more stable.

Government revenue
- Tariffs are a great way to collect government revenue, especially for lower-income economies.

Protection of jobs
- Free trade can lead to unemployment in certain industries that get outcompeted.

Economically least developed country (ELDC) diversification
- To diversify industries, lower developed countries might use protectionism to protect growing industries.

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