Introduction
Trade protection involves the use of policy instruments to restrict imports and protect domestic industries from foreign competition. While free trade promotes efficiency and global integration, trade protection is often used to support infant industries, preserve employment, or respond to unfair trade practices. Two of the most commonly used tools are tariffs and quotas.
Instruments of Trade Protection
Governments use various instruments to protect domestic industries. These measures are broadly classified as tariff and non-tariff barriers.
1. Tariffs
- Taxes imposed on imported goods.
- Increases the price of imports, making domestic products more competitive.
- Types:
- Ad valorem tariff: Based on a percentage of the import value (e.g., 10% of the product price).
- Specific tariff: Fixed amount per unit (e.g., ₹50 per kg).
2. Quotas
- Quantitative limits on the amount of goods that can be imported.
- Restricts supply and can raise domestic prices.
- Used when governments want more control over import volumes than prices.
3. Subsidies
- Financial aid to domestic producers to lower their cost of production.
- Helps them compete against cheaper imports.
- Examples: Export subsidies, production grants.
4. Import Licensing
- Importers must obtain a license to bring goods into the country.
- Helps the government monitor and restrict imports selectively.
5. Voluntary Export Restraints (VERs)
- Agreements between exporting and importing countries to limit the quantity exported.
- Used in sensitive sectors like automobiles or textiles.
6. Technical Barriers to Trade
- Strict product standards, health, and safety requirements that make it difficult for foreign products to enter the market.
7. Anti-dumping Measures
- Imposed when a country exports goods at prices lower than the domestic market or cost of production.
- Aims to protect local producers from unfair competition.
8. Exchange Rate Manipulation
- Deliberate devaluation of currency to make exports cheaper and imports costlier.
Quotas vs Tariffs – Key Differences
| Aspect | Tariffs | Quotas |
|---|---|---|
| Definition | Tax on imported goods | Physical limit on quantity of imports |
| Revenue | Generates revenue for the government | No revenue unless quota licenses are auctioned |
| Market Effect | Raises price; quantity determined by market | Fixes quantity; price determined by demand/supply |
| Transparency | More transparent and adjustable | Can lead to corruption in license allocation |
| WTO Acceptance | More acceptable under WTO rules | Heavily restricted under WTO |
Advantages of Trade Protection
- Protects infant industries
- Preserves jobs in domestic sectors
- Protects strategic and culturally important industries
- Reduces dependence on foreign products
Disadvantages
- Reduces efficiency and consumer choice
- Encourages retaliation and trade wars
- May lead to higher prices for consumers
Conclusion
Trade protection instruments like tariffs and quotas play a significant role in shaping trade policies and protecting national interests. However, overuse or misuse can distort markets and harm consumer welfare. Policymakers must strike a balance between protectionism and liberalization, keeping in mind the long-term economic goals and global trade commitments.