Analyse the Effects of Protectionist Policies in the Global Economy
Protectionist policies are those policies imposed on trade that are created by governments which has the effect of giving domestic producers an artificial advantage over foreign competitors. Despite the fact that many countries are now favouring free trade, historically governments felt it was necessary to impose protectionist barriers to trade including the need to assist infant industries, protecting industries from overseas firms dumping goods, and reducing unemployment. The main protectionist measures include tariffs, import quotas, and subsidies.
Tariffs are a government imposed tax on import that raises the price of the imported goods making the domestic producer more competitive.
Diagram – The Effect of a Tariff
• OP is the price the imported good would sell if there were no tariff applied. At this price consumers demand OQ1, domestic producers supply OQ2, and the quantity imported would be QQ1
• If a tariff of PP1 is imposed demand will contract to OQ3 and domestic supply will extend to OQ2, and imports will fall to Q2Q3
As a result of tariffs being imposed it stimulates domestic production and employment where domestic producers supply a greater quantity of the good. More resources are attracted to the protected goods leading to a reallocation of resources towards less efficient producers. Consumers are made to pay higher prices and receive fewer goods redistributing income away from consumers to producers.
But as a retaliation effect other countries may impose tariffs on goods and services exported to them. Any increased production and employment gains for the import increasing industries would be offset by losses in their export industries. As a result of these imposed tariffs the buying and selling of goods and services on global markets between countries reduce trade, and therefore prevent a global economy.
An import quota controls the volume of a good that is allowed to be imported over a given period of time guaranteeing domestic producers a share of the market.
Diagram – The effect of a import quota
• OP is the price at which the imported goods would sell if there was no quota imposed. At this price consumers demand OQ1, domestic producers supply OQ, and the quantity imported would be QQ1
• If the government imposed a quota restricting imports to Q2Q3, this would have the effect of raising the price of imported goods to OP1 and would allow domestic supply to extend to OQ2
The effect of a quota is much the same as those of a tariff except the government does not get any tax revenue. If countries impose quotas on their imports, then other countries retaliate by imposing quotas on their imports as well. Again there is reduced trade in global markets reducing the possibility of a global economy, which works as one.
Subsidies involves the financial assistance to domestic producers, which enables them to reduce their selling price and compete more easily with imported goods. Subsidies are generally favoured over tariffs by economists as a form of protection because [next page]