Explain three types of protectionism that a government might adopt in the context of international trade

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


4 responses to “Explain three types of protectionism that a government might adopt in the context of international trade

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