PROTECTION

METHODS OF PROTECTION AND THE EFFECTS OF PROTECTIONIST POLICIES ON THE

DOMESTIC AND GLOBAL ECONOMY - TARIFFS, SUBSIDIES, QUOTAS, LOCAL CONTENT RULES,
EXPORT INCENTIVES
TARIFFS:
A tariff is a gov-imposed tax on imports. It has the effect of raising the price of the imported goods,
making the domestic producer more competitive.

● The curves SS and DD represent domestic supply and demand.

● P is the price of imported goods if there was no tariff applied (in a situation of free trade). At this
price consumers demand Q1, domestic producers supply Q and the quantity imported would be
Q1.
● If a tariff of P1 is imposed, all of which is passed on to the consumer, demand will contract to Q3,
domestic supply will expand to Q2 and imports will fall to Q2 Q3.
● Following the imposition of the tariff, the gov will raise revenue from ABCD
Economic effects of a tariff
- Domestic producers supply a greater quantity of the good. Therefore, the tariff stimulates
domestic production and employment
- More domestic resources are attracted to the protected industry. This leads to a reallocation of
resources towards less efficient producers (those who are unable to compete on an equal footing
with foreign producers), causing world GDP to decline.
- Consumers pay a higher price and receive fewer goods. This redistributes income away from
consumers to domestic producers.
- The tariff raises revenue for the gov but that is not the primary objective. In fact, the more
successful the tariff as a protectionist policy (that is, the more imports it restricts), the less
revenue it will raise.
- A tariff can provoke a retaliation effect, where a trading partner imposes some kind of trade
barrier against a country imposing a tariff on its exports.

QUOTAS:
An import quote controls the volume of a good that is allowed to be imported over a given period of time,
normally for the purpose of protecting domestic production. It may also be used to reduce the quantity of
undesired goods entering a country.

● The curves SS and DD represent domestic supply and demand

● P is the price at which the imported goods would sell if there was no quota imposed. At this price,
consumers demand Q1, domestic producers supply Q and the quantity imported would be Q1
● If the gov imposed a quota restricting imports to Q2 Q3 this would have the effect of raising the
price of imported goods to P1. This price would allow domestic supply to expand to Q2.

Economic effects of a quota

- Domestic producers supply a greater quantity of the good. Therefore, the quote stimulates
domestic production and employment in the protected industry.
- More resources in that economy are attracted to the protected industry, leading to reallocation of
resources from other sectors of the economy (where production and employment will fall).
- Consumers pay a higher price and receive fewer goods. This redistributes income away from
consumers to domestic producers in the protected industry and results in lower overall levels of
economic growth.
- Unlike tariffs, quotas do not directly generate revenue for the gov. However, govs can sometimes
raise a small amount of revenue from quotas by administering the quota through selling import
licences allowing firms to import a limited number of goods.
- As with tariffs, the imposition of a quota on imports can invite retaliation from the country whose
exports may be reduced because of the quota. This can result in lower exports for the country
that initiated the import quota.

SUBSIDIES:

Subsidies involve financial assistance to domestic producers, which enables them to reduce their selling
price and compete more easily with overseas producers. In the graph below this is shown by a rightward
shift of the domestic industry’s supply curve from SS to S1S1, which results in a lower market price.
Businesses will be able to sell a higher quantity of their product on both domestic and global markets. The
quantity produced increases from Q to Q1. The size of the subsidy in per unit terms is the vertical
distance between S and S1.
Economic effects of a subsidy

- Domestic producers supply a greater quantity of the good. Therefore, the subsidy stimulates
domestic production and employment in the protected industry.
- More resources in that economy are attracted to the protected industry, leading to reallocation of
resources from other sectors of the economy (where production and employment will fall).
- Consumers pay a lower price and receive more goods because the subsidy shifts the supply
curve for the sector to the right. However, consumers still pay indirectly for subsidies through
higher taxes.
- Subsidies impose direct costs on gov budgets because they involve payments from the gov to the
producers of the G&S. This means that govs have fewer resources to allocate to other priorities
such as education and health care.
- While economists are opposed to protectionist policies, they often prefer a subsidy to a tariff
because subsidies tend to be abolished more quickly - since they impose costs on the budget
rather than generating revenue.

Local content rules: specifying that goods must contain a minimum % of locally made parts
● In return, imported contents may not attract a tariff
● eg. a minimum of 55% of free-to-air TV from 6am-midnight must be locally produced

Export incentives: programs that give domestic producers assistance such as grants, loans or technical
advice, encouraging businesses to penetrate global markets or expand their market share
● Export Market Development Grant (EMDG): up to 50% export promotion costs; has assisted over
51,000 AUS firms in starting up exporting
Do not protect businesses from foreign competition in domestic market but still a barrier to free trade

Overall economic effects of protectionism

Protectionist policies reduce the overall level of trade between nations. For an individual economy,
protectionism means that exports and imports will be a smaller share of the national economy.
Protectionist policies reduce living standards and reduce global economic growth by shielding inefficient
producers. They make it more difficult for individual economies to specialise in production in which they
are most efficient. Businesses are less able to achieve economies of scale and therefore have lower
profits and lower dividends. With fewer competitive pressures, prices for G&S in individual economies are
higher. This leads to slower economic growth in individual countries.

The negative economic impact of the protectionist policies of trading blocs tends to be larger (relative to
the size of those economies) for developing economies that are often excluded from access to the
markets of advanced economies. In making its case against protectionism, the world bank has highlighted
that increased trade helps reduce global poverty.
Why are economists (generally) opposed to protectionist policies?
● Protection distorts the allocation of resources in an economy away from areas of more efficient
production to less efficient production → can create unemployment and lower growth rates
● Makes it more difficult for countries to specialise in what they are most efficient in → businesses
less able to achieve economies of sale, prices for g/s higher
● Retaliation from other countries → as a global economy, inefficient resource allocation → lower
GWP
○ Following COVID, protectionist policies could reduce global economic output by $10T by
2025
○ Accordingly, a global reduction in living standards follows
● Reduces the positive effects of Free Trade (and exacerbates poverty in developing countries)
○ President Biden’s 2023 export restriction to limit China’s access to tech will cause trade
between the two economies to decrease by US$63 billion from now to 2031