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Study notes

Protectionism and Open Trade

  • Levels: A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas

Protectionism involves any attempt by a country to to impose restrictions on the open trade in goods and services.

The main aim of protectionism is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting solely from the interplay of free market forces of supply and demand.

Open trade, therefore, is the opposite of protectionism. Open trade involves the removal or reduction of barriers to international trade.

Main Forms of Protectionism

There are many ways in which country can seek to protect a market. The most common are outlined below.

Tariffs

A tariff a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply. For example, until recently, Mexico imposed a 150% tariff on Brazilian chicken. The United States has an 11% import tariff on imports of bicycles from the UK.

Quotas

Quotas are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period. For example, until 2014, South Korea maintained strict quotas on imported rice. It has now replaced a quota with import tariffs designed to protect South Korean rice farmers. Quotas do not normally bring in any immediate tax revenue for the government although if they cause domestic production and incomes to expand, there will be a beneficial impact on taxes paid.

Export subsidies

A subsidy is a payment to encourage domestic production by lowering their costs. Soft loans can be used to fund the dumping of products in overseas markets. Well known subsidies include Common Agricultural Policy in the EU, or cotton subsidies for US farmers and farm subsidies introduced by countries such as Russia. In 2012, the US government imposed tariffs on Chinese manufacturers of solar panel cells, judging that they benefited from unfair export subsidies after a review that split the US solar industry.

Domestic subsidies

Domestic subsidies involve government help (state aid) for domestic businesses facing financial problems e.g. subsidies for car manufacturers or loss-making airlines.

More Specialised Kinds of Protectionism

Outlined below are more specialised forms of protectionism, although these can often have significant effects on competition in markets.

Import licensing

In this case, governments grant importers the license to import goods – these can be restricted

Exchange controls

This form of protectionism involves limiting currencies that can move between countries (also known as capital controls)

Financial protectionism

An example of financial protectionism would be when a national government instructs banks to give priority when making loans at favourable interest rates to domestic businesses

Murky or hidden protectionism

An example of murky or hidden protectionism is government measures that indirectly discriminate against foreign workers, investors and traders. A government subsidy that is paid only when consumers buy locally produced goods and services would count as an example. Deliberate intervention in currency markets e.g. to bring about a currency devaluation might also come under this category.

Voluntary Export Restraint (VER)

This is where two countries make an agreement to limit the volume of their exports to one another over an agreed time period. Sometimes this is enforced by a government for example the USA enforced VER on Japan during the late 1980s

Intellectual property laws e.g. patents and copyright protection protecting domestic ideas and products

Technical barriers to trade

These include product labelling rules and stringent sanitary standards. Technical barriers to trade increase product compliance costs and impose monitoring costs on export agencies. Big vertically integrated transnational businesses can usually cope with these non-tariff barriers but many of the least developed countries do not have the technical sophistication to overcome these non-tariff barriers.

Preferential state procurement policies

This is where a government favour local/domestic producers when finalising contracts for state spending e.g. infrastructure projects or buying new defence equipment

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