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Protectionism
Section 4.2
Outline
Protectionism The effect of a tariff on imports The effect of tariffs on social welfare Various protectionist methods Arguments in favor of protectionism Arguments against protectionism
Barriers to international trade adopted by the government to protect the domestic industry. Protectionist measures include tariff and non-tariff barriers.
Protectionism
Barriers to trade
TariffsA tariff is a tax on imports.
Non-Tariff Barriers (NTB)Non-tariff barriers, unlike tariffs are less direct protectionist measures, which are used to reduce the volume of imports.
The effect of a tariff on imports
Q
P
D
S
SwPw
Qd1Qs1
Pw + tariff
Qd2Qs2
imports
The imposition of the tariff reduced imports from Qs1-Qd1 to Qs2-Qd2
Consumer surplus
The consumer surplus is the difference between the maximum price that consumers are willing to pay and the price that they actually pay.
Q
PS
D
Pe
Producer surplus
The producer surplus is the difference between the minimum price that producers are willing to charge and the price that they actually charge.
Q
PS
D
Pe
The effect of a tariff on welfare
Q
P
D
S
SwPw
Qd1Qs1 Qd2Qs2
imports
Consumer surplus
The effect of a tariff on welfare
Q
P
D
S
SwPw
Pw + tariff
Qd2Qs2
imports
Consumer surplus
The imposition of the tariff reduces the consumer surplus
The effect of a tariff on welfare
Q
P
D
S
SwPw
Pw + tariff
Qd2Qs2
imports
Consumer surplus
While producers and the government gain from the tariff, their combined gain is smaller than the loss to the consumer.
Area a: increase in producer surplus due to tariff
Area c: government tariff revenue
Areas b and d: dead-weight loss to society due to tariff
a b c d
Non- Tariff Barriers (NTBs)
QuotasA limit on the quantity that could be imported.
Excessive customs formalitiesComplex and excessive customs formalities delay the imports of goods.
Non- Tariff Barriers (NTBs)
VERVoluntary export restraints are bilateral agreements whereby one country voluntarily agrees to restrict the volume of its exports to the other country.
Non- Tariff Barriers (NTBs)
Excessive standard requirementsThese could be health and safety standards, or other standard requirements. In this case, imports are restricted by imposing high standards that could only be met with difficulty by the exporters.
Non- Tariff Barriers (NTBs)
SubsidiesSubsidies are payments by the government to producers to lower the price of a good or service. Subsidies lower the price of domestic goods and encourage consumers to buy them instead of imports.
The effect of a subsidy on imports
Q
P
D
S
SwPw
Qd1Qs1 Qs2
imports
A subsidy reduces imports from Qs1-Qd1 to Qs2-Qd1
s1
Arguments for protectionism
To support infant industries– An infant industry is an industry in its
early stages of development.– Protecting a newly formed industry
through trade barriers will shield it from competition and allow it to mature.
For strategic reasonsIt would be unadvisable to overly rely on food imports as they could be threatened at times of war.
Arguments for protectionism
To improve the balance of payments– The balance of payment is a set of accounts
recording the earnings from exports and capital inflows as well as payments for imports and capital outflows.
– When the outflows of foreign currency exceed the inflows, the balance of payment is in deficit.
– Protectionist measures reduce the amount of imports and may result in an improvement in the balance of payment.
Arguments for protectionism
To avoid overspecializationProducing only those goods in which a country has a comparative advantage in, may result in being too dependent on few goods or services.e.g. Many south American countries were hit hard by the plummeting coffee prices due to their economies’ reliance on this crop.
Arguments for protectionism
To prevent Dumping– Dumping refers to exporting goods at a
lower price than the price for which the good is sold in the home country.
– Dumping occurs when a good is sold at a price lower than its cost of production
– protectionist measures could be imposed as an anti-dumping prevention
Arguments against protectionism
Protectionism results in a net loss in social welfare
The loss in consumer surplus, which results from the higher import prices and the reduced consumption exceeds the gain in producer surplus, which results from the higher price and the increased production and the gain in tariff revenues to the government.
Arguments against protectionism
Uncompetitive exportsShielding the domestic industry from competition may lead to a decline in productive efficiency. Domestic firms will not keep up with technological advancements and may become less competitive in international markets.
Arguments against protectionism
RetaliationThe imposition of tariffs and NTBs exposes the country to retaliation from trading partners.Exports may decrease as trading partners retaliate by imposing tariffs on the country’s exports.
The End
