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Protecting The Domestic Market

How can a domestic market be protected? If a country had protected domestic market, what would be the likely effect on its balance of trade? Do you think that domestic market protection is to the disadvantage of most people in the country?

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Protecting Domestic Markets

Protectionism may be the defined as an economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, export subsidies, administrative barriers to trade and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies.

A tariff is usually defined as a tax on imports, but sometimes on exports. Import tariffs tend to act as a tax on imports and they are or can be used to raise the price of imported goods to prevent 'unfair' competition for domestic producers. They vary by country and origin and can also be considered as a revenue generating means for governments.

A quota is a limit that is imposed on the quantity of a good that can be imported and it is usually implemented by means of licenses. These licenses are obtained by importers from the government, normally for a price (which also generates revenue); or the government grants them an allowance to bring in a specific number of units of goods. Aside from governments imposing quotas; quotas can also be negotiated with importing countries which agree voluntarily to restrict the amount of imports.

Export Subsidies
Export subsidies are government payments made to domestic firms to encourage exports and can also act as a barrier to trade. Agriculture is an industry that is heavily subsidized in countries around the world. Many countries, especially in Europe, continue to appease their farmers by heavily subsidizing exports of agricultural products.

Administrative Barriers

Countries can make it difficult for firms to import by imposing restrictions and being 'deliberately' bureaucratic. These trade barriers range from stringent safety and specification checks to extensive hold-ups in the customs arrangement and all the other administrative procedures that make it harder (and more costly) to import rather than to produce and sell locally. A good example is the quality standards imposed by the EU on imports of dairy products. While it is difficult to measure the effects of administrative barriers to trade, many small business people argue that such barriers are a serious impediment.

Other Restrictive Measures
Other typical methods by which a domestic market can be protected are by utilizing government procurement policies, embargoes, exchange controls, export taxes, tax cuts to local businesses and other direct state intervention. When it comes to government procurement, most countries give preference to domestic producers. This means that a domestic government will give preference to a local supplier, even if a lower price could be obtained elsewhere. Such a policy creates an incentive for domestic suppliers to quote higher prices than they otherwise would. Embargoes is where the government completely bans certain imports (e.g. drugs) or exports to certain countries (e.g. to enemies during war). Exchange Controls include limits on the amount of foreign exchange made available to importers (financial quotas), or to citizens travelling abroad, or for investment. Alternatively, they can be in the form of charges made on people purchasing foreign currencies.

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Solution Summary

This solution includes information about how a domestic market may be protected. It tells you if a country had a protected domestic market, what the likely effect on the country's balance of trade would be. It also provides you with arguments for and against protectionism. This solution is adequately referenced.