A developing country's government uses protectionist policies to shield its steel industry from foreign competition. A disadvantage of this policy is that
Question 1 Report
A developing country's government uses protectionist policies to shield its steel industry from foreign competition. A disadvantage of this policy is that
Answer Details
The correct answer is domestic steel producers may become inefficient without competitive pressure.
Protectionism shields domestic firms from foreign competition. Without the pressure to match the prices or quality of foreign rivals, domestic producers have less incentive to innovate, cut costs or improve efficiency. Over time this can make the protected industry weaker rather than stronger.
Protection tends to raise, not lower, domestic prices because cheaper imports are restricted. The whole point of protectionism is to prevent foreign firms from gaining market share, not to increase it. The government would still collect tariff revenue if tariffs are the instrument used, so it would not lose all tariff revenue.
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