Protection

Protection can be defined as any type of government policies that give domestic producers an advantage over foreign competitors. The purpose of the government to impose a protection to their country is to prevent dumping, protection of domestic employment and infant industries. Protection policies such as tariffs, quotas and subsidies affect the global economy. This is because of the government trying to impose a protectionist barrier to foreign competitors, i.e. to reduce or stop imported goods and services from entering into the domestic market. Dumping occurs when a foreign competitor tries to sell their goods and services in another country’s market at an incredibly low price. This will lead to local producers and firms to collapse being unable to compete at the low price. Thus, allowing foreign competitors to dominate in the domestic market. To prevent this kind of circumstance to occur the government will use protectionist methods i.e. introducing a tariff. A tariff is a government imposed tax on imported goods for the purpose of protecting the domestic industries. Its effect is to raise prices on foreign imported goods and services in order to make domestic producers more competitive. In the diagram shown above, the quantity of imports before tariff is QQ1. However, the quantity of imports after the tariff is reduced to Q2Q3. At price 0P the demand is at 0Q1 but as the tariff is being applied to 0P, the demand will contract to 0Q3. This will result in consumers paying higher prices and receiving fewer goods. Foreign competitors will consider lowering importing goods and services as it is not as productive as before. Hence, producing goods for foreign competitors will be very inefficient in allocating resources and affect the global economy. One of the most popular advantages of protection is saving local jobs. If domestic producers were to be protected from competition with cheaper foreign import, this will increase the demands for domestic goods. Therefore, creating more domestic employment and is especially relevant during an economy in a recession when unemployment rate rises. To combat a fall in domestic employment the government may introduce an import quota. An import quota controls the amount of goods that is allowed to be important through a period of time. This will guarantee domestic produce to have a share of the market. Just like the tariff graph, the quota graph above has a price 0P where there is no quota imposed. At this price the demand is 0Q1, domestic supply is 0Q and the quantity imported is QQ1. If the government imposed a quota, the price 0P will increase to 0P1. This will restrict the imports to Q2Q3 and allow the domestic supply to expand to 0Q2. This results in a greater quantity of goods from the domestic producer which stimulates the domestic employment. The economic effect of a quota is very similar to the tariff. But unlike the tariffs, government do not directly receive revenue from the quotas. However, it has the potential to raise a small amount of revenue for the government by selling import license allowing firms to import goods. New industries usually face a lot of difficulties in their early adoption into the market. They start out having higher costs on goods compared to matured firms competing. This results in a need in protection for a short period of time in order for them to expand and is able to reduce their costs of production so that they are able to compete with the world. The government will introduce a protectionist policy known as a subsidy. A subsidy is cash payments from the government to give to businesses to assist them to reduce their selling price and compete internationally, i.e. encouraging productions of goods and services to influence allocation of resources in the economy. As the diagram demonstrates, the original supply curve SS is shifted to the right S1S1. Therefore, the market price drops from P to P1. The quantity produced increases from Q to Q1. This means domestic firms are able to sell a higher quantity of their products in both global and domestic markets. Subsidies, tariff and quotas are very similar to each other, i.e. stimulate domestic production and employment, reallocation to resources. Subsidies are different in one way, i.e. subsidy imposes a direct cost on government revenue. This leads to lower resources to allocate to other priorities such as health and education. The Global Financial Crisis which believed to have begun in July 2007 with the credit crunch. By September 2008, the crisis has worsened as stock markets around the world collapsed. This led economies into a global recession with an increasing unemployment rate. Government were forced to use protection to combat this recession i.e. the tariff is able to stimulate domestic production and employment. However, consumers will require to pay a higher price for fewer goods and this will lead to a slow painful way to increase economic growth. Through the discussion of effects of protectionist policies on the global economy, there are disadvantages and advantages of protection. Usually, protection is use to save an economy’s domestic producers and industries. This should be used only for emergency purpose as the disadvantages of protection can potentially make consumers lose money.