How do tariffs and subsidies protect domestic producers
Trade policies are the goals, regulations, and standards set by any nation driven by political and economic reasons. There are several instruments to regulate the trade activities, Tariff and subsidy are such instruments which are used by any government in order to protect producers from the competition of similar foreign producers.
Tariff is the duty or charge imposed to import and export certain goods and services from a foreign country. The tariff to the goods can be imposed in order to encourage domestic producers for economic activity. It can be based on a specific fixed rated system.
The goods which are to be preserved to the domestic market are imposed a high tariff for exporting whereas to restrict and discourage more import to support local industries from severe competition there is high tariff in the import of goods. It is an instrument used by the government which helps to boom the domestic market from giant competitors of similar goods from other nation.
The subsidy is the grant given by the government to the domestic players in order to promote the production at low cost and can be able to fulfill the supply and export the goods and service. The subsidy can be provided by the government in the form of cash, credit, government guarantee to get a loan, tax discount, etc.
In order to promote the local business operators, the subsidy is essential. With the help of subsidy even if the foreign competitor comes to compete with the local market, local producers and products are not affected.
Both the tariff and subsidy are tool or instrument of government to protect and promote the domestic producers from the competition of the foreign market.