Question

Name and define three policy tools for enacting protectionism.

Short answer

Three policy tools for enacting protectionism are: 1. Tariffs: A tax imposed on imported goods to increase their cost, making them more expensive than domestically produced goods, thus giving local producers an advantage in their home market. 2. Import Quotas: Restrictions on the quantity of specific goods that can be imported into a country during a particular period, which protects domestic industries from competition. 3. Subsidies: Financial support provided by the government to domestic industries to help them compete against their foreign counterparts, lowering their production costs and making their products more price competitive.

Step-by-step solution

1. Tariffs

A tariff is a tax imposed on imported goods. It increases the cost of imported goods, making them more expensive than domestically produced goods. This gives local producers an advantage in their home market, as foreign competitors' products become less attractive to consumers due to the higher price. Tariffs can be specific (a fixed amount per unit) or ad valorem (a percentage of the product's value).

2. Import Quotas

An import quota is a restriction on the quantity of a specific good that can be imported into a country during a particular period. This restriction can be in the form of an absolute limit or a percentage of total domestic demand. By limiting the number of imports, import quotas protect domestic industries from competition. They often benefit local producers by ensuring that they are able to sell a certain amount of their products in the domestic market. Import quotas may also be used to stabilize domestic prices by restricting the supply of foreign goods in the market.

3. Subsidies

A subsidy is financial support provided by the government to domestic industries to help them compete against their foreign counterparts. Subsidies can take many forms, including tax breaks, low-interest loans, grants, or direct payments to producers. These financial incentives allow domestic firms to lower their production costs, making their products more price competitive with imports. Subsidies can encourage domestic production, support specific industries, and assist with development and job creation. However, they can also lead to trade disputes and may be seen as a form of protectionism when they distort international trade.