Protectionsim

• Protectionism

  Any barrier that restricts free trade taking place between nations
• Types of protectionism

  • Tariffs (tax on imports)
  • Quota (quantity limit)
  • Embargo (ban on imports)
  • Subsidies (to lower domestic producers' costs)
  • Administrative barriers (e.g. health/safety standards, environmental standards)
• Infant industry argument

  Newly developing domestic firms need protection (e.g. tariffs, quotas) to grow and develop economies of scale to compete with established international firms
• The infant industry argument is a weak argument as it allows domestic firms to be inefficient
• Dumping

  A country selling goods/services below the cost of production, often due to excess subsidies or minimum prices in the home country
• It is very difficult to prove dumping is actually taking place
• Protecting domestic employment

  Protectionist measures to protect jobs and prevent structural unemployment as domestic industries decline
• Protecting declining industries just delays the inevitable and disrupts the natural transition of workers to other industries
• Protecting against unfair low-cost labor abroad

  Using protectionist measures (e.g. standards, safety regulations) to create a 'level playing field' and prevent imports from countries with very low labor costs
• Raising government revenue

  Protectionist measures like tariffs can generate revenue, especially important for developing countries to fund public goods
• Improving the current account deficit is a weak argument for protectionism as it invites severe retaliation
• Avoiding over-specialization

  Protectionism allows a country to develop a diverse range of industries rather than over-relying on one export industry
• Tariff

  A tax on imports
• How a tariff distorts a free trade market

  1. Domestic supply increases

  2. Domestic demand decreases

  3. Imports are squeezed
• Tariff is imposed

  Supply curve of imports shifts up
• Supply curve of imports shifts up

  Price in the market increases
• Price increases

  • Domestic supply extends
  • Domestic demand contracts
• Domestic supply extends<|>Domestic demand contracts

  Imports are squeezed
• Tariff diagram


  • Green box = tariff revenue for government
  • Red triangle = dead weight loss of consumer surplus
  • Triangle = dead weight loss of world efficiency
• Domestic suppliers producing extra units from q1 to q3 are less efficient than world suppliers
• Tariff is imposed

  Protects infant industries and allows them to grow and benefit from economies of scale
• Tariff is imposed

  Protects against dumping by raising the price of imports
• Tariff is imposed

  Protects domestic employment by increasing domestic supply
• Tariff is imposed

  Increases government revenue
• Tariff is imposed

  Improves the current account position by reducing import expenditure
• Impact of tariff imposition

  1. Price increases

  2. Domestic demand decreases

  3. Domestic supply increases

  4. Imports decrease
• Disadvantages/problems of imposing tariffs

  • Distorts the market
  • Reduces consumer surplus
  • Causes deadweight welfare loss
  • Reduces consumer choice
  • Leads to production inefficiency
  • Causes retaliation from other countries
  • Burdens consumers, especially those with low incomes
• Many of the arguments against tariffs are also applicable to other forms of protectionism
• Imposing a tariff

  Increases the price and reduces the quantity of imports
• Reduction in quantity of imports

  Reduces consumer choice
• Increase in domestic production due to tariff

  Leads to production inefficiency as domestic producers are less efficient than foreign producers
• Imposing a tariff

  Leads to retaliation from the country whose exports are targeted
• Tariffs on essential/basic goods

  Disproportionately burden low-income consumers
• Evaluating the impact of a tariff can consider the size of the tariff and the elasticity of demand and supply
• If demand and supply are inelastic, the reduction in quantity of imports due to a tariff will be smaller