It is the responsibility of the government to ensure that domestic producers are protected from unfair competition created by external firms. This phenomenon is referred to as trade protectionism (Ma & Lu, 2011). International trade is fundamental, but in some cases, it can limit the potential of domestic industries. This is particularly common with infant industries that require time to mature. Other factors that influence government protection include diversification, industrial decline and national security. Government protection allows domestic industries to succeed and experience rapid growth. Free-trade provides successful international companies with the opportunity to take over a nation’s markets. The essay discusses import quotas, export subsidies, anti-dumping and tariffs as some of the domestic industries protection tools commonly used by governments.
In simple terms, tariff is taxes or duties that a government places on imported goods. Such tariffs are usually high, and they can function as partial or complete barriers to imports. If a government desires partial protection, imports continue to enter into the domestic market but in smaller quantities. At the same time, the government collects customs duties. Partial restriction pushes the prices of imported products higher whereas the price of domestic substitutes remains unaffected. This is because the revenue collected by the government raises the business costs of the foreign supplier (Ma & Lu, 2011). On the other hand, complete restriction stops the importation of the affected goods. A government levies tariffs in the form of a specific percentage of the value of the target product or service. Mostly, tariff rates vary with products, and they are only imposed on imports. There are two types of tariffs: specific tariff and as Valorem tax.
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In some cases, national governments promote some domestic producers through subsidies. Tax exemptions, special governmental contracts, cash disbursements and tax exemptions are some of the ways in which a government can extend subsidies (Ma & Lu, 2011). Subsidies allow the recipients to enjoy a cost advantage and compete more efficiently. According, they manage to offer their products and services at more affordable prices at the national and international levels. The benefit of subsidies is mainly felt in countries that engage actively in export business.
Import quotas are quantitative measures that restrict international trade by regulating the quantity of a product brought into a country (Ma & Lu, 2011). Import quotas come in three forms known as negotiated bilateral, multilateral and unilateral quotas. Import quotas prevent domestic producers from stiff competition that can push them out of business. Although quotas are very effective, sometimes they make the consumer pay more if domestic producers decide to raise the prices of their commodities.
Another measure used by the government to protect domestic industries is anti-dumping. Dumping is a typical behavior whereby some companies sell the same product at different prices in different national markets (Ma & Lu, 2011). Therefore, the price of the product is usually lower in one market. Dumping is a form of price discrimination that is unpopular in many countries. Anti-dumping regulations are effective measures of blocking foreign competition. Many countries within the World Trade Organization (WTO) framework have been using anti-dumping to maintain fair trade and to protect their domestic markets.
Lastly, despite the benefits associated with protectionism tools, their negative effects viewed are also catastrophic. Sometimes, tariffs discourage companies from selling their products in certain foreign countries. Partially protective tariffs can strain the consumers by making imported products unaffordable. Completely restrictive tariffs can provide domestic producers with the opportunity to exploit consumers as a result of reduced competition. Import quotas prevent domestic consumers from accessing the affected products easily because of reduced supply of imports. Subsidies can also have negative effects if they are not managed well.
Ma, J., & Lu, Y. (2011). Free trade or protection: A literature review on trade barriers. Research in World Economy , 2 (1), 69.