© pilot publishing company ltd. 2005 chapter 11 international trade ii --- protectionism

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© Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

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Page 1: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Chapter 11 International Trade II

--- Protectionism

Page 2: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Contents:

• Reasons for protectionism

• Economic effects of tariff and quota

• Differences between tariff and quota

Page 3: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Reasons for Protectionism

Page 4: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Protectionism

What is protectionism?

to restrict international trade and

to protect a country’s own interest

is the arguments for and the actions of imposing measures

Page 5: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Non-economic reasons

1. Protect strategic industries that are essential to the security and survival of the country

2. Protect industries that are regarded as symbols of progress and development

3. Prohibit the trading of harmful goods like drugs

4. Prevent the export of advanced technology

5. Set up economic sanctions for political reasons

Page 6: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Economic reasons

1. Protect infant industries temporarily

2. Provide a transitional period for the industrial base to change

3. Fight against dumping

4. Prevent over-concentration by diversification

5. Correct market distortion

6. Deter foreign protectionist measures

7. Improve the terms of trade

Page 7: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Misconceptions Trade is a zero-sum game that a country’s gain is the other’s loss (being exploited).

A country will lose money and job opportunities in buying foreign products instead of domestic products. If foreign wage rates are lower than domestic wage rates, under competition, local workers will have to lower their wage rates and living standard.

Import restriction is an effective and efficient means to lower the unemployment rate. Free trade benefits everyone.

Page 8: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Conclusion

Free trade is better than no trade as it raises the world’s output and brings many other benefits to the trading countries.

However, restricted trade is sometimes more beneficial than free trade to the country practising protectionism.

Page 9: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Means of Protection

a tax imposed on imports to raise their prices

Quota

Subsidies on exports or import-competing industries

Tariff

a maximum quantity limit on imports

to improve their competitiveness.

Page 10: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Exchange control

Embargo a ban on trade

Exporters have to sell their foreign currencies earned to the monetary authority at fixed exchange rate while importers have to apply from the authority for using foreign currencies in external payments.

Page 11: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Economic Effects of Tariff and Quota

Page 12: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Producer’s surplus

Consumer’s surplus

The situation without trade (the autarky situation)

P

Q

Domestic supply under autarky

Domestic demand

Pd

Q10

Total surplus

Page 13: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

The situation with free trade P

Q

Domestic supply under autarky

Domestic demand

Pd

Q10 CO0

Import

Pw

PO0

Domestic supply with free trade

Page 14: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

New total surplus ()

New producer’s surplus ()

New consumer’s surplus ()

P

Q

Domestic supply under autarky

Domestic demand

Pd

Q10 CO0

Import

Pw

PO0

Domestic supply with free trade

Page 15: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Old total surplus (without trade)

New total surplus with trade ()

P

Q

Domestic supply under autarky

Domestic demand

Pd

Q10 CO0

Import

Pw

PO0

Domestic supply with free trade

Gain from free trade

Page 16: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

P

Q

Domestic supply under autarky

Domestic demand

Pd

PO00

Domestic supply with free trade

New import

The situation after the imposition of tariff

Domestic supply with tariff

CO1PO1 CO0

Pw

Pw + t

Page 17: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

P

Q

Domestic supply under autarky

Domestic demand

Pd

PO00

Domestic supply with free trade

New import ()

The situation after the imposition of tariff

Domestic supply with tariff

CO1PO1 CO0

Pw

Pw + t

New consumer’s surplus ()

New producer’s surplus ()

Government revenue = Tariff x Amount imported

Page 18: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Total surplus with free trade

P

Q

Domestic supply under autarky

Domestic demand

Pd

Q10 CO0

Import

Pw

PO0

Domestic supply with free trade

Compared with the situation with free trade

Page 19: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

P

Q

Domestic supply under autarky

Domestic demand

Pd

PO00

Domestic supply with free trade

New import

Domestic supply with tariff

CO1PO1 CO0

Pw

Pw + t

Deadweight loss under tariff

Deadweight losses

Page 20: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

New CS New CS + PS+ PS

P

QDomestic demand

Pd

0

Domestic supply under autarky

The situation after the imposition of quota

Domestic supply with free trade

Domestic supply with quota

PO0 PO1 CO1 CO0

Quota

New import

Page 21: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Additional loss if the quota is allocated by non-price method

P

QDomestic demand

Pd

0

Domestic supply with quota

Domestic supply with free trade

PO0

Deadweight losses

PO1 CO1 CO0

Domestic supply under autarky

New import

Page 22: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Other effects1. Quality of products is improved

2. Wealth redistribution The one who gains in domestic country –

import-competing industries; government; society The one who loses in domestic country – consumers

The one who gains in foreign country – consumers

The one who loses in foreign country – export industries; society

Page 23: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Differences between Tariff and Quota

Page 24: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Tariff Quota

Nature A tax A quantity restriction

Wealth redistribution

Raises the government revenue

Does not raises the government revenue unless it is auctioned

off by the government

Amount of imports

A variable depending on the

elasticity of domestic demand

for imports

Fixed

Page 25: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Tariff Quota

Deadweight losses

Loss in the gain from trade (CO) and loss from extra cost (PO)

Additional loss if the quota is allocated by

non-price method

Market power of domestic producers

Domestic producers cannot raises the domestic price

Domestic producers may raises the

domestic price by reducing their output

Result of changes in market situations

The amount of imports is variable

The amount of imports is fixed

Page 26: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

Correcting Misconceptions:

1. Import restriction reduces the amount of imports and raises the terms of trade.

2. Free trade is better than no trade and restricted trade.

3. Buying domestic products instead of foreign products keeps both money and jobs in the domestic country.

Page 27: © Pilot Publishing Company Ltd. 2005 Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd. 2005

4. Free trade is beneficial to everyone.

5. The imposition of a tariff and a quota brings the same results to an economy.

Correcting Misconceptions: