Protectionism: Protectionism occurs when countries adopt policies to protect their domestic industries from foreign competition. The main protectionist policies are tariffs, quotas, and subsidy.
• Tariff
Tariffs are taxes on goods imported into a country. They are often used by governments trying to reduce the level of imports into a country. The imposition of tariff upon the product indicates that the price will rise from Sw to Sw + tariff. Imports will fall from Q1Q2 to Q3Q4 and domestic production will increase from Q1 to Q2.
ex)Mexico imposes tariffs on US apples
• Quota
Quota is a limit on the quantity of goods that can be imported into a country. Results in loss to domestic consumers, gain for domestic producers and a windfall profit to some overseas suppliers. No direct financial cost to government but will result in hostility from trading partners.
ex) Mackerel quota in Iceland
• Subsidy
A subsidy is a payment made to firms or consumers designed to encourage an increase in output. A subsidy will shift the supply curve to the right and therefore lower the equilibrium price in a market. The domestic supply curve shifts downwards from Sdomestic to Sdomestic + subsidy. The price to consumers remains the same, but imports fall from Q1Q2 to Q3Q2 and domestic production increases from Q1 to Q3.
ex) UK’s subsidy on electric cars
