Economics

Economics

Protection refers to any action by a national government that gives domestic producers an advantage over foreign competitors. In general, the amount of protection between countries has been declining due to a range of factors such as trade agreements which allows countries to benefit from free trade. However, there are many policies that a country can adopt to increase protection of trade such as tariffs and quotas in order to protect the domestic producers. Since WWII, many international organizations and trading agreements have been established to try and breakdown the trading barriers between countries and reduce the amount of protection to increase trade in the global economy.

There are many methods that a government can provide to protect domestic producers from international trade. The first method of protection is a tariff which is a tax imposed on imported goods. This method has been used by governments to increase the price of imports to allow domestic producers to be able to produce goods and sell it without such high competition. They can increase their supply of goods in the market and also charge a higher price. There is one main effect from this protectionist policy in the global economy and numerous effects on the domestic economy. Since the price of the imported good is higher within the domestic economy, consumers pay higher prices and will be less likely to purchase the imported good. This will lead to lower supplies of imports and less trade within the global economy. As Fig.1 shows, when imports are introduced, the quantity supplies by domestic producers significantly falls however the tariff raises the price of the imports and domestic producers can supply more. (William P. Anthony, 1988 PP. 22)

Another form of protectionist policy is a subside. This is a cash payment made by the government to domestic producers to reduce the firms production cost of the product. This allows the firm to produce the good at lower prices, making them more competitive in the domestic market. As Fig.2 demonstrates, the effect of a subsides allows a domestic producers supply to increase due to lower production costs. The effect of this method of protection is that there is less market share in the domestic market for imports therefore decreasing the quantity of free trade in the global economy.

A quota restricts the amount of a good that could be imported into a country. A quota effectively allows domestic porducers to increase their market share and at the same time allows them to increase their prices. Quotas have many effects on the domestic market such as allowing domestic producers to have greater market share. Globally, a quota will limit the imports cause a decline in the trade between countries.

Local content rules refer to government protection policies where a certain percentage of the good or services has to be domestically produced. This allows the domestic producers not to be in competition with other imports. Other types of protection are export incentives where the government provides incetives for firms to expand and fund ...