Protectionism

Protectionism is where the government shields domestic producers by restricting foreign competition.

There are a number of ways a government can protect industry including:

Causes

Governments protect for a number of reasons:

To protect employment especially structural unemployment in declining industries
Changes to comparative advantage in the world economy may lead to governments seeking to protect declining / infant industries
Governments may seek to control imports to improve their balance of payments account
As a reaction to dumping of excess capacity at low prices by other countries
To increase government revenue
To try and encourage import substitution to occur

Consequences

Protectionism increases the prices of imported goods for consumers resulting in a loss of consumer surplus
Increased cost to the government to enforce the controls
Domestic companies who import materials or components from overseas are faced with higher costs
Threat of retaliation from other countries
Protectionism makes domestically produced goods more attractive

Direct Protectionism

Direct Protectionism includes tariffs
Tariffs act as taxes on imports which make them more expensive for domestic consumers
As imports become more expensive relative to exports it means consumption of them declines
Tariffs also earn money for the government

Protectionism and the EU

The EU is a customs union which allows free movement of goods, services and factors of production between member states
No EU member can protect against any other EU member

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