The paper "Policy Instruments Are Used in Protectionism" is a perfect example of a business assignment. The government plays a key role in businesses. One of the principal roles of the government is to ensure that domestic industries are safeguarded from competition from foreign firms. For instance, the government has a role to ensure that sunrise/infant or sunset/declining industries are protected from the competition so as to allow them to develop, grow and become competitive in the global marketplace. To protect domestic businesses/industries, the government uses a variety of policy instruments. This essay describes the policy instruments used in protectionism and highlights the instruments that tend to be used since the move away from protectionism. Tariffs are the most common protectionism policy instrument.
A tariff is a form of tax imposed by the government on imported goods. Taxes are levied on the imported goods for two main reasons namely to raise government revenues and to protect local industries. Tariffs act as protectionism instrument because by taxing the imports, this raises the prices of the imported products in the local market, thus reducing the demand of those imported products due to high prices.
The other instrument is the quotas. A quota is a non-tariff barrier that involves putting a limit on the number of goods or services that can be imported from a foreign country for a given period of time. When the government imposes quotas on certain products, this limits the supply of that product in the local market, consequently causing the prices of that product in the local market to rise and this gives local businesses the opportunity to capitalize on the high demand for that product.
The government can also use this policy instrument to protect local industries against dumping. The embargo is the other common policy instrument used by governments as a form of protectionism. The embargo is a physical control mechanism that involves putting a ban on the importation of certain products, such as drugs or arms. The embargo is regarded as the most severe form of quota. The embargo is imposed mainly for political or social reasons. For instance, the UK government has imposed an embargo on North Korea because of its terrorism-related activities.
Additionally, the government can sometimes opt to use exchange control as a form of protectionism. Exchange control is a form of protection that involves restricting or controlling the number of foreign currencies that importers can buy. This measure is usually taken as a policy measure to restrict the ability to import, thus helping protect domestic industries. Other policy instruments include the use of exports taxes, export subsidies and exchange rate management and voluntary export restrictions. Although protectionism has been a common method that governments have used to protect local industries and jobs, the world has been slowly moving away from protectionism to a competitive market model.
Under the competitive market model, the market is allowed to operate free of government regulations and the market direction is influenced by the forces of demand and supply. This implies that the market is left to operate freely without government interference. There are various policy instruments used under a competitive market model. The first being researcher and development (R& D) concession offered by the government to various sectors of the economy to promote growth and development.
There has been an increase in R& D tax concessions offered by governments in free-market economies to catalyze local R& D. These tax incentives make it cheaper for companies to invest in R& D activities to promote the growth of local industries. There is also an increased use of subsidies under the competitive market model. Subsidies are government supports in the form of money offered by the government to support businesses to reduce the cost of doing business so that the same benefits can be transferred to the consumers.
Additionally, governments are also increasingly using the policy of deregulations by reducing government regulation of industries so as to allow markets to function freely without state interference. Other policy instruments that are commonly used in free markets include incentives and strategic investment facilitation.