protectionism: trade barriers

Download Protectionism: Trade Barriers

Post on 22-Jan-2016




0 download

Embed Size (px)


Protectionism: 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


  • Protectionism:Trade Barriers

    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



View more >