Question

Name and define three policy tools for enacting protectionism.

Short answer

Three policy tools for enacting protectionism include: 1. Tariffs: These are taxes imposed on imported goods and services, making them more expensive for consumers and giving domestic producers a competitive advantage. Tariffs protect local industries and raise government revenue but may hurt international trade relations. 2. Import Quotas: These are restrictions on the quantity of goods that can be imported into a country during a specific period. Import quotas protect domestic industries from foreign competition but can distort markets, lead to inefficiencies, and provoke retaliation from trading partners. 3. Export Subsidies: These are financial supports provided by the government to domestic companies to promote their products in international markets. Export subsidies protect domestic market share and maintain employment but can lead to market distortions and unfair competition, and may be challenged by international trade organizations such as the WTO.

Step-by-step solution

1. Tariffs

Tariffs are taxes imposed on imported goods and services, which make them more expensive for consumers. By increasing the price of imported goods, domestic producers are given a competitive advantage as their products become comparatively cheaper. Tariffs serve as a tool to protect local industries from foreign competition and to raise revenue for the government. However, they can also lead to retaliatory measures from other countries affected and may hurt international trade relations.

2. Import Quotas

Import quotas are restrictions on the quantity of goods that can be imported into a country during a specific period. This policy tool limits the availability of foreign products, allowing domestic industries to grow without facing intense competition from abroad. For example, a country may decide that only a certain number of cars can be imported each year, effectively limiting the foreign competition in the car industry. However, import quotas can distort markets, lead to inefficiencies, and provoke retaliation from trading partners.

3. Export Subsidies

Export subsidies are financial support provided by the government to domestic companies to promote their products and services in international markets. These subsidies can take the form of tax breaks, direct payments, or low-interest loans that help reduce the cost of production and make the products more competitive in foreign markets. By supporting domestic industries and their ability to export, the government aims to protect their market share and maintain or increase employment. However, this policy tool can lead to market distortions, unfair competition, and may be challenged by international trade organizations such as the World Trade Organization (WTO).