protectionism: trade barriers
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DESCRIPTIONProtectionism: Trade Barriers. Every year there is some version of this on the test . FREE TRADE or PROTECTIONISM?. Free trade = no trade barriers Trade is allowed to be conducted w/o any restrictions Absence of artificial barriers (government imposed) - PowerPoint PPT Presentation
Every year there is some version of this on the test
FREE TRADE or PROTECTIONISM?Free trade = no trade barriersTrade is allowed to be conducted w/o any restrictionsAbsence of artificial barriers (government imposed) Protectionism = imposing trade barriers to protect the income of domestic producers
Overview of Types of ProtectionismDirect forms of ProtectionismEmbargoTariffsQuotasubsidies
Alternative forms of ProtectionismVERExchange ControlsImport LicensesAdministrative BarriersHealth and safetyenvironmental
Complete Free TradeDue to comparative advantage, imports flow in at P2, as foreign merchants can undercut domestic production.PriceQuantityP1,domesticQ1DS domestic1Pt. 2 trade benefits consumers because prices are lower (fromp1 to p2) and they have more goods available, Q0 to Qw.Domestic producers lose because they sellless, A to Q0 and at a lower price, p2 insteadOf p1. S world 2P2, worldWA0
Embargo: Total ban or lack of tradeMay be self-imposed by a domestic government Self-imposed embargos on illegal drugs, endangered animals etc Imposed from outside for political or military reasons.Most effective when country cant produce embargoed goods by themselves, or at a very high cost.PriceQuantityPQ1DS domestic1Pt. 1 is equilibriumfor domestically produced goods.
Tariff: tax on importsad valoremA tax on a good whose amount depends on the value of the good or service, eg. 15% sales taxPriceQuantityP2P1Q1DS domesticS world TariffP3CWASB012453
Tariff - Domestic ImpactProducers benefit- A to B and those producing at 0 to A get higher price (0P3 rather than 0P2) Consumers lose- higher prices at P3 and fewer goods at C rather than W.Government gainsPriceQuantityP2P1Q0DS domesticS world TariffGov. RevenueP3CWASB01244435
Tariffs as a percentage of total government revenueSource: World Bank
CountryTariffs as a % of Government RevenueU.K.0.1%Japan1.2U.S.1.5Costa Rica16.1Ghana31.2Dominican Republic44.2Lesotho55.1
Quotas- A physical limit on the amount of goods which may be imported in a set period of time
PriceQuantityP2P1Q0DS domesticS world Equilibrium with quotaP3CQwQuotaEquilibrium with freetrade. At P20AB
Quota- Domestic ImpactProducer Benefits Better than free trade but not as good as an embargo Consumer Result Increased P but decrease Q compared to free trade but lower P and higher Q than without free trade. PriceQuantityP2P1Q0DS domesticS world Equilibrium with quota at P2 the free trade allows certain goods in up to the max of B and then no more M allowed so supply =SdP3CQwQuotaEquilibrium with freetrade. At P20AB
Subsidies applied to domestic goods to make them cheaper and more competitive with imports.PriceQuantityP1PQ0DS domesticS domestic w/subsidyP2CQw2S world0
Subsidies Domestic Impact Domestic producers this decreases costs for domestic producers so they can compete with imports.Consumers pay same p as with free trade and receive same QPriceQuantityP1PQ0DS domesticS domestic w/subsidyP2CQw2S world00-Q0 produceddomesticallyQ0-QW imported
Alternative Forms of Protection Voluntary Export Restraints (VER)Exporting country agrees to a voluntary quota of exports into a second countryExchange ControlsGovernment limits amount of foreign currency available to importers, or citizens traveling abroad, or companies investing abroadImport LicensingForm of rationing where the importer must obtain a license, or permission to importAdministrative BarriersSafety, health or environmental requirementsOther forms of red-tape obstacles
Arguments for Protectionism Military self-sufficientInfant IndustryProtect developing industry in LDCsDeclining IndustriesAllow firms a period of protectionProtecting EmploymentAnti-DumpingDumping: product exported at a price below production costs
Arguments Against ProtectionismHIGHER PRICES Poor Resource Allocation
What else? (see text)
Costs of protecting U.S. jobs from foreign competitionSource: Coughlin, et al. (1988) and Hufbauer, et al. 1986.
Effect of tariffs and quotas on imports, domestic production, and pricesPW is the world pricethat is, the price of the good that world be established in a global market without trade barriers.Pd is the domestic pricethat is, the price in the domestic market if imports were equal to zero. Qd is the domestic output of a good if imports are zero. T is a tariff (measured in dollars, yen, lira, pesetas, etc.) per unit, ton, pound, etc.Pq is the domestic price under the imposition of a quota.
Figure 8.8a: Effect of an embargo on Japanese watchesWorld price is $12.50Embargo pushes price paid by domestic buyers to $15.00Loss of CS = BDEACDE is the dead weight loss (welfare loss)
effect of a tariff on oranges0Price ($)Quantity (tons)DSPWPW + TPdFree trade importsImports with tariffq1q5q4qdq2Domestic production increases from q1 to q2. The domestic price of oranges increases.
effect of a Quota on oranges0Price ($)Quantity (tons)DSPWPqPdImport quota = 100 tons100400300250200Domestic production increases from 100 to 200 tons.. The domestic price of oranges increases. Free trade imports = 300 tonsS + Quota