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.