Protectionism (Leaving Cert Business): Revision Notes
Protectionism
What is protectionism?
Protectionism describes the actions and policies that governments use to shield their domestic industries from overseas competition. This is achieved by creating various barriers that make it harder or more expensive for foreign goods to enter the domestic market.
Protectionism refers to government actions and policies intended to protect domestic industries from foreign competition by imposing barriers to trade, e.g. tariffs, quotas, embargoes.
Governments implement protectionist measures for several important reasons:
- Reduce imports and make foreign goods more expensive for consumers
- Protect jobs in domestic industries that might otherwise be lost to foreign competition
- Safeguard specific industries that are considered strategically important
- Improve the balance of payments by reducing money flowing out of the country
The balance of payments measures all economic transactions between a country and the rest of the world. When imports exceed exports, money flows out of the country, which can weaken the domestic economy.
Methods of protectionism
There are five main ways that governments can protect their domestic industries from foreign competition. These methods work by either increasing costs, limiting quantities, or creating obstacles for foreign competitors.
Tariffs
A tariff is a tax placed on imported goods, similar to a customs duty. When a government imposes a tariff, it increases the price that consumers pay for foreign goods. This makes domestic products more competitive because they become relatively cheaper in comparison.
A tax on an import, e.g. customs duty
Worked Example: Irish Beef Protection
If Ireland places a tariff on New Zealand beef, it becomes more expensive for Irish consumers to buy. This makes Irish-produced beef more attractive and competitive in the domestic market.
For instance, if New Zealand beef costs €10 per kg and Ireland imposes a 20% tariff:
- Original price: €10 per kg
- Tariff: €10 × 20% = €2 per kg
- New price for consumers: €12 per kg
This makes Irish beef at €11 per kg more competitive than the imported alternative.
Quotas
A quota sets a maximum limit on how many units of a particular good can be imported or exported during a specific period. Quotas work by restricting the quantity of foreign goods entering the market, which reduces competition for domestic producers and can help maintain higher prices.
A limit on the number of units of a good that may be imported or exported
Real-World Application: EU Textile Protection
The EU has implemented quotas limiting the number of clothing items that can be imported from China, helping to protect European textile manufacturers. If the quota is set at 1 million garments per year, once this limit is reached, no additional Chinese clothing can be imported until the next year.
Embargos
An embargo is a complete ban on importing goods from a specific country. Embargos are often implemented for political rather than purely economic reasons. They represent the strongest form of protectionist measure.
A total ban on the import of goods from one particular country
Historical Examples of Embargos
- 1996 BSE Crisis: The EU banned all UK beef imports due to concerns about BSE (mad cow disease), protecting both public health and domestic beef industries
- Political Embargos: The USA maintains long-running embargos against several countries including Cuba, North Korea, and Iran for political reasons rather than economic protection
Subsidies
A subsidy is financial assistance that governments provide to domestic companies to help reduce their operating costs. By lowering production costs for domestic firms, subsidies help them compete more effectively against foreign companies and offer lower prices to consumers.
A payment made by national governments to domestic firms to help them with their day-to-day operating costs
EU Subsidy Programs
The EU has historically subsidised both agriculture and aircraft manufacturing to help European companies compete against international rivals:
- Agricultural subsidies: Help European farmers compete with lower-cost producers from developing countries
- Airbus subsidies: Enable European aircraft manufacturers to compete with American companies like Boeing
Administrative regulations
These involve governments creating bureaucratic obstacles that make importing goods as difficult and time-consuming as possible. This approach is sometimes informally called "red tape" because it creates layers of bureaucracy that foreign companies must navigate.
Common administrative barriers include:
- Requiring excessive paperwork and documentation
- Creating deliberate delays at customs
- Demanding unnecessarily complex approval processes
Administrative regulations are often subtle forms of protectionism that can be difficult to identify and challenge through international trade agreements.
Documentation Barriers in Practice
The EU and Japan have been known to use extensive documentation requirements on certain products as an indirect way of limiting imports. For example, requiring separate safety certifications for every model variation of imported electronics, even when the differences are minor.
Real-world context
The scale of international trade is enormous, which explains why protectionist measures can have such significant economic impacts. According to the European Commission, EU firms export over £58 billion worth of goods and £28 billion in services to Japan every single year. This demonstrates the massive financial stakes involved when governments implement trade barriers.
These figures represent just the trade between the EU and Japan alone. When considering global trade flows, the amounts involved reach into the trillions of pounds annually.
Key Points to Remember:
- Protectionism aims to shield domestic industries from foreign competition through trade barriers
- The five main methods are tariffs, quotas, embargos, subsidies, and administrative regulations (remember: TQESA)
- Tariffs increase import prices, while quotas limit import quantities
- Embargos completely ban imports from specific countries, often for political reasons
- Subsidies help domestic firms compete by reducing their costs, while administrative regulations create bureaucratic obstacles for importers
- Each method works differently but achieves the same goal: making foreign competition less threatening to domestic industries