Protectionism is a government philosophy towards foreign trade. According to this philosophy, governments should use tariffs and quotas to protect domestic firms from foreign competition. Protectionist trade policies are designed to push a country's current account deficit towards surplus, by trying to boost a country's export income or reduce import expenditure.
Examples of Protectionism
1. Tariffs: A tariff is a tax on imported goods and seivces. Tariffs are used by governments that have protectionist tendencies as they are designed to make imports more expensive compared to domestically produced substitutes. They should help domestic producers to fight off foreign competition within domestic markets.
2. Quotas: A quota is a physical limit on the volume of imported goods that can be sold into a country's domestic market. Quotas are a protectionist policy tool. If the volume of imported goods allowed into a market is restricted, domestic consumers will have no choice but to purchase domestically produced subsistutes once a quota has been filled. An embargo is a zero quota, ie. a complete ban on a country's exports.
3. Subsidies: A subsidy is a sum of money given to the producer, on a per unit basis, by the government. Subsidies reduce costs, enabling market price cuts without threatening profit margins. Some countries use subsidies to give domestic firms an unfair cost advantage over foreign firms that do not recieve the same subsidies from their governments.
4. Hidden barriers to trade:
a. Manipulating Indirect Taxation Rates: Trade can be diverted in favour of domestic manufacturers by increasing excise duties on products typically imported, whilst cutting excise duties on products typically exported. The high excise duties on imports increase its price, making it less attractive than the domestically produced substitutes.
b. Prevention of Immigration: Some governments prevent the freedom of movement of people within a customs union by refusing to recognise the professional qualifications of immigrants. The idea is to stop foreign nationals from taking jobs that could otherwise be done by a local.
c. Delays and bureaucracy at borders: Some countries deliberately create mountains of paperwork that exporters have to wade through in order to cross their national border. As a result, this can act as a disincentive for foreign firms that want to sell goods in a domestic market.
d. Legal Barriers: Some countries change product regulations and safety standards on a regular basis in order to block out foreign imports.
e. Procurement: Public sector procurement policies may benefit domestic suppliers. For example, for many years the Italian government have only bought Italian cars for its police force, even if Italian made cars represent poor value for money compared against foreign substitutes.
f. Public information campaigns: Information campaigns may encourage households to adopt protectionist buying habits. For example, in Britain in the 1970s, the government tried to encouarge consumers to "Buy British".