Day 91: International Trade Policy

To protect domestic industries from foreign competition, governments have an arsenal of tools they can apply.

1. Import tariffs

Import tariffs are taxes that have to be paid on imported products. Import tariffs are used to raise government revenue (in that case we speak of revenue tariffs) or to protect domestic firms against competition from foreign firms (in that case we speak of preotective tariffs).

Import tariffs are actually a way of making the price of foreign goods more expensive than they actually are. If the price becomes more expensive, the demand for the foreign products will go down.

2. Import quotas

A more direct approach towards managing imports is the use of import quotas. Import quotas are stipulations of how many of a good can be imported. One of the differences is that governments create an additional revenue through import tariffs, but not through import quotas.

3. Subsidies

Instead of placing import tariffs on foreign goods, governments can also subsidise local firms. The logic here is that, due to the additional funds from the subsidies, the costs of production are not as heavy and thus, firms can afford to lower their price to be able to compete with foreign firms.

4. Exchange controls

If the US government wishes to limit the amount of imports from Europe, it can limit the amount of euros its citizens can acquire to purchase European goods.