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  • 7/17/2019 3 Protectionism

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    Copyright2004 South-Western

    9Application:

    International Trade

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    Copyright 2004 South-Western/Thomson Learning

    The Effects of a Tariff

    A tariff is a tax on goods produced abroad and

    sold domestically.

    Tariffs raise the price of imported goods above

    the world price by the amount of the tariff.

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Price

    with tariff Tariff

    Importswithout tariff

    Equilibrium

    without trade

    Price

    without tariff

    World

    priceImports

    with tariff

    QS

    QS

    QD

    QD

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Importswithout tariff

    Equilibrium

    without trade

    Price

    without tariff

    World

    price

    QS

    QD

    Producer

    surplus

    before tariff

    Consumer surplus

    before tariff

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    A

    B

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Price

    with tariff Tariff

    Importswithout tariff

    Equilibrium

    without trade

    Price

    without tariff

    World

    priceImports

    with tariff

    QS

    QS

    QD

    QD

    Consumer surplus

    with tariff

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    C

    G

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Price

    with tariff Tariff

    Importswithout tariff

    Equilibrium

    without trade

    Price

    without tariff

    World

    price

    QS

    Imports

    with tariff

    QS

    QD

    QD

    Producer

    surplus

    after tariff

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    E

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Price

    with tariff Tariff

    Importswithout tariff

    Price

    without tariff

    World

    price

    QS

    Imports

    with tariff

    QS

    QD

    QD

    Tariff Revenue

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    Figure 6 The Effects of a Tariff

    Copyright 2004 South-Western

    C

    G

    A

    ED F

    B

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    demand

    Price

    with tariff Tariff

    Importswithout tariff

    Price

    without tariff

    World

    priceImports

    with tariff

    QS

    QS

    QD

    QD

    Deadweight Loss

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    The Effects of a Tariff

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    10/23Copyright 2004 South-Western/Thomson Learning

    The Effects of a Tariff

    A tariff reduces the quantity of imports and

    moves the domestic market closer to its

    equilibrium without trade.

    With a tariff, total surplus in the marketdecreases by an amount referred to as a

    deadweight loss.

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    The Effects of an Import Quota

    An import quota is a limit on the quantity of a

    good that can be produced abroad and sold

    domestically.

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    Figure 7 The Effects of an Import Quota

    Copyright 2004 South-Western

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domestic

    supply

    +Import supply

    Domestic

    demand

    Isolandian

    price with

    quota

    Importswithout quota

    Equilibrium

    with quota

    Equilibrium

    without tradeQuota

    Imports

    with quota

    QD

    World

    price

    World

    price

    Price

    without

    quota=

    QS

    QD

    QS

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    The Effects of an Import Quota

    Because the quota raises the domestic price

    above the world price, domestic buyers of the

    good are worse off, and domestic sellers of the

    good are better off. License holders are better off because they

    make a profit from buying at the world price

    and selling at the higher domestic price.

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    Figure 7 The Effects of an Import Quota

    Copyright 2004 South-Western

    A

    E'C

    B

    G

    D E" F

    Price

    of Steel

    0 Quantity

    of Steel

    Domestic

    supply

    Domesticsupply

    +Import supply

    Domestic

    demand

    Isolandian

    price with

    quota

    Importswithout quota

    Equilibrium

    with quota

    Equilibrium

    without tradeQuota

    Imports

    with quota

    QD

    World

    price

    World

    price

    Price

    without

    quota=

    QS

    QD

    QS

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    The Effects of an Import Quota

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    16/23Copyright 2004 South-Western/Thomson Learning

    The Effects of an Import Quota

    With a quota, total surplus in the marketdecreases by an amount referred to as a

    deadweight loss.

    The quota can potentially cause an even largerdeadweight loss, if a mechanism such as

    lobbying is employed to allocate the import

    licenses.

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    The Lessons for Trade Policy

    If government sells import licenses for fullvalue, revenue equals that of an equivalent

    tariff and the results of tariffs and quotas are

    identical.

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    The Lessons for Trade Policy

    Both tariffs and import quotas . . .

    raise domestic prices.

    reduce the welfare of domestic consumers.

    increase the welfare of domestic producers.

    cause deadweight losses.

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    19/23Copyright 2004 South-Western/Thomson Learning

    The Lessons for Trade Policy

    Other Benefits of International Trade

    Increased variety of goods

    Lower costs through economies of scale

    Increased competition

    Enhanced flow of ideas

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    20/23Copyright 2004 South-Western/Thomson Learning

    THE ARGUMENTS FORRESTRICTING TRADE

    Jobs

    National Security

    Infant Industry

    Unfair Competition

    Protection-as-a-Bargaining Chip

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    21/23Copyright 2004 South-Western/Thomson Learning

    CASE STUDY: Trade Agreements and theWorld Trade Organization

    Unilateral: when a country removes its traderestrictions on its own.

    Multilateral: a country reduces its trade

    restrictions while other countries do the same.

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    22/23Copyright 2004 South-Western/Thomson Learning

    CASE STUDY: Trade Agreements and theWorld Trade Organization

    NAFTA

    The North American Free Trade Agreement

    (NAFTA) is an example of a multilateral trade

    agreement. In 1993, NAFTA lowered the trade barriers among

    the United States, Mexico, and Canada.

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    CASE STUDY: Trade Agreements and theWorld Trade Organization

    GATT

    The General Agreement on Tariffs and Trade

    (GATT) refers to a continuing series of negotiations

    among many of the worlds countries with a goal ofpromoting free trade.

    GATT has successfully reduced the average tariff

    among member countries from about 40 percent

    after WWII to about 5 percent today.

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