In international trade, governments often implement various protectionist methods to shield domestic industries from foreign competition. These methods are designed to promote local economic activity by making domestic goods more competitive against imports.

Tariffs

A tariff is a tax imposed on goods and services being imported into a country. They are implemented to increase the cost of imported items, to allow domestic industries to maintain competitiveness. This means, as a government increases tariffs, they will increase protection, hence aiding domestic industries. However, this will reduce their interactions with the global economy, which can have significant impacts on their economic growth.

Over the last few decades, the global economy in general has seen a move toward free trade and reduction in protection. This is reflected in the World Bank's study on worldwide tariffs, where they found the average applied tariff rate worldwide was 2.59%. This demonstrates the global push toward economic integration and overall economic growth.

Subsidies

Subsidies are another form of protection. However, unlike tariffs and quotas, they aim to aid domestic industries rather than disadvantage international competitors. Thus, a subsidy involves governments providing financial support to local firms, helping them create cheaper products to produce and sell in the domestic and international market. Additionally, subsidies can take various forms, including direct payments, tax breaks, or low-interest loans.

One notable example of recent Australian subsidies is the substantial support provided to the fossil fuel industry. In the 2023-2024 fiscal year, Australia allocated approximately $14.5 billion in subsidies to fossil fuel producers and major users. This represents a significant increase from the $11.1 billion in the previous fiscal year, indicating a 31% rise in subsidies. This increase in subsidies is represented by the graph below, which displays the rise in Australian subsidies since 2021. It should be noted that the 2024 fiscal year is a predicted value based on previous trends.

Quotas

A quota, otherwise known as an import quota, is a limit set on the amount of goods that can be imported into a country during a specific time frame. Governments use this protectionist policy to protect domestic industries from dumping, control the supply of certain goods that come into the country, and influence trade patterns.

Australia uses a wide range of import quotas in their agricultural sector. For instance, Australia has applied quotas on the importation of certain agricultural products like bananas. These quotas are in place to protect local farmers from overwhelming competition from larger international markets, which might have lower production costs and could potentially flood the Australian market with cheaper products, undermining local production.

Local Content Rules

Local content rules do not do what other protectionist policies do and try to exclude foreign competition, but rather impose rules on domestic firms. These rules require that goods and services provided must contain a certain percentage of locally produced components (including labour) to qualify for a subsidy or to be sold within the domestic market. Governments use local content rules to promote domestic production, create jobs, and encourage technology transfer. For example, the Australian Jobs Act 2013 mandates that all mining projects valued at over AUD 500 million need to provide full, fair, and reasonable opportunity for Australian industries to participate.

What are the Limitations of Trade Barriers?

While these methods of protection can provide short-term benefits to domestic industries, they also have their drawbacks. Trade barriers can lead to higher prices for consumers, reduced competition and innovation, and potential retaliation from trading partners. Moreover, the benefits of protection may accrue primarily to the protected industries, while the costs are borne by the wider economy.

Types of Protection Diagrams - How to Read Them:

In your HSC economics exams, you will be required to complete multiple choice, short-answer and essay type questions. All three of these sections could contain questions relating to the interpretation of tariff, subsidy and quota diagrams. Additionally, these types of diagrams are great to use as evidence in your essays, as markers love to see thoughtful and accurate arguments. Go to our module on HSC economics graphing to explore how to read and interpret diagrams about protectionist policies. Protection Diagrams