Chapter 2: Trade in the Global Economy
2.3 Notes - Methods of Protection

Most countries shield their domestic producers from foreign competition with protectionist
measures.

Shift from traditional protectionist measures (tariffs and subsidies), towards less visible
measures (Administrative barriers and industry Assistance plans)
Tariffs

Tariffs are taxes on imported goods imposed for the purpose of protecting Australian
Industries.
o
Raises prise of imported goods  Decreases demand for goods  Makes Domestic
Producers more competitive.
 Impacts of Tariffs

Stimulates domestic production and employment
o

Reallocation of resources towards less efficient producers
o

Increases the market share of ‘import competing industries’.
To those firms who would otherwise not be able to survive
Consumers pay a higher price and receive fewer goods
o
Prices of all goods, including domestic goods increases as when faced with the
increasing price of imports, domestic producers take advantage of the chance to
increase their profit margin.

Raises Government Revenue

Retaliation effect through countries alternatively imposing their own tariffs.
Quotas

Quotas refer to restrictions on the amounts or values of various kinds of goods that may be
imported.
o
(Controls volume of imports over a period of time).

Restricting imports would raise the price of imported goods.

Effects similar to that of tariffs but exclude increases in government revenue although selling
import licences create revenue.

Some countries  Tariff Quotas  Goods imported up to the quote pay the standard tariff
rate whereas goods imported above the quote pay a higher rate.
o
Australia’s textile, clothing, footwear and motorvehicle industries thus protected.
Subsidies

Subsidies are cash payments from the government to businesses to encourage production of
a good or service and influence the allocation of resources in an economy. Subsidies are
often granted to businesses to help them compete with overseas produced goods and
services.

Decreasing Production Costs  Provokes Increase in Supply

Subsidies preferred to Tariffs:
o Subsides are a government expenditure rather than revenue  more likely to be
regularly reviewed and removed when necessary.
o Subsidies tend to reduce prices, lowering inflation and benefiting consumers.
Voluntary Export Restraints

As part of trade negotiations, countries may agree to restrict number of exports in exchange
for similar concessions from the other country.  Usually only for short time period

Eg. In 2005, the Chinese Government imposed export tariffs on 2-10%
o
Pre-empt other countries, concerned about China’s increasing dominance of the
world textile market, from imposing import tariffs on China’s exports.
Local content rules

Specify that goods must contain a minimum percentage of locally made parts. In return, the
imported components may not attract a tariff.
o

Eg. Protection of Australia’s motor industry and television broadcasting services.
Purpose of TV protection: foster Australian content, to promote Australian culture rather
than protecting jobs.
Export incentives

Domestic producers assistance  grants, loans or technical advice (such as marketing or
legal information)  penetration of global markets or expand their market share.

Popularity grown  nations have moved to a greater focus on capturing foreign markets,
rather than protecting import-competing businesses, as a strategy to achieve higher
economic growth and employment.

Export incentives do not protect businesses from foreign competition in the domestic
market, but are nevertheless an artificial barrier to free trade.
Key Terms:
-
Tariffs
-
Subsidies
-
Local Content Rules
-
Quotas
-
Voluntary Export
Restraints
-
Export Incentives
Summary:
There are a range of different methods of protection; consisting of tariffs, quotas, subsidies,
voluntary export restraints, local content rules and export incentives. The ultimate role of them
consists of protecting the domestic industry. There has been a gradual shift away from direct
methods of protection such as tariffs, quotas and subidies to export incentives which are used to
assist domestic producers within their international operations.