What is Protectionism?
Protectionism is an economic policy which is meant to benefit domestic producers of goods and services When is Protectionism used?
- Used by countries when they think their industries are being damaged by unfair competition by other foreign countries - Usually seen as a "protective" measure
- Useful in the short-run, however it can make the businesses (and therefore also the country) less competitive on the global marketplace Types of Protectionism
1. Taxation (Tariffs): Was one of the reasons for the severity of the Great Depression 2. Government subsidies on local businesses with tax credits or direct payments 3. Quotas (Quantitative limit on imported goods)
4. Deliberated attempt to lower currency value, what could start a currency war (APP/DEPP)
Advantages of Protectionism
- Protect infant industry from foreign competition
- Helps local businesses develop their own competitive advantages - Since domestic businesses are protected, they will hire locally Disadvantages of Protectionism
- Weakens the local economy in the long-term, since companies don't innovate, due to a lack of competitiveness - Consumers will therefore pay more for a relatively lower-quality product - Since domestic businesses are protected, they will hire locally
Why Free Trade?
Free trade is associated with the idea of deregulation and, therefore, a "free flow" of capital around the whole world. International trade barriers have decreased massively over the past few decades. As a result, there is a greater incentive for businesses to export as well as import goods- This has resulted in greater FDI flowing into and out of countries. In simple terms, costs for trading internationally have gone down, making international trade much more lucrative. - Concept of TRADE BLOCS: Areas with no trade restrictions (fewer regulations, promotes liberty and freedom of choice, common currency, faster distribution channels...) Advantages of Free Trade
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