Rather than generating tax revenue as do tariffs, subsidies require tax revenue. therefore, they are not an effective protective device.

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pohnpei397 eNotes educator| Certified Educator

This is not necessarily a true statement.  Of course, it is true that subsidies take up tax revenues rather than bringing them in.  However, revenue is not the main point of having a trade barrier.  The main point is to help products from one’s own country outcompete products from other countries.  The fact that subsidies take up tax money does not prevent this.

Subsidies can be an effective protective device.  This is because they help domestic companies compete with foreign countries.  Tariffs help by raising the prices of the foreign goods.  Subsidies help by lowering the sale price of the domestic goods.  If, for example, farmers are given subsidies, the price of producing their crops will go down.  When the price of production goes down, the price for which they sell goes down as well.  When the prices are reduced with the help of the subsidies, domestic products become much more competitive.  In this way, the subsidies can be seen as an effective protective device.