Protectionism aka Trade Barriers 3.1b. Every year there is some version of this on the test

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1 Protectionism aka Trade Barriers 3.1b Every year there is some version of this on the test

2 FREE TRAE or PROTECTIONISM? Free trade = no trade barriers Trade is allowed to be conducted w/o any restrictions Absence of artificial barriers (government imposed) Protectionism = imposing trade barriers to protect the income of domestic producers.

3 Overview of Types of Protectionism irect forms of Protectionism Embargo Tariffs Quota subsidies Alternative forms of Protectionism VER Exchange Controls Import Licenses Administrative Barriers Health and safety environmental

4 Embargo: Total ban or lack of on trade May 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 can t produce embargoed goods by themselves, or at a very high cost. P 1 Pt. 1 is equilibrium for domestically produced goods. Q1

5 Complete Free Trade ue to comparative advantage, imports flow in at P2, as foreign merchants can undercut domestic production. P1,domestic P2, world 0 A Q1 1 2 W S world Pt. 2 trade benefits consumers because prices are lower (from p1 to p2) and they have more goods available, Q0 to Qw. omestic producers lose because they sell less, A to Q0 and at a lower price, p2 instead Of p1.

6 Tariff: tax on imports ad valorem A tax on a good whose amount depends on the value of the good or service, eg. 15% sales tax P1 P 3 P S Tariff S world 0 A B Q1 C W

7 Tariff - omestic Impact Producers 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 gains Gov. Revenue P1 P 3 P S Tariff S world 0 A B Q0 C W

8 Quotas- A physical limit on the amount of goods which may be imported in a set period of time Quota P1 P 3 Equilibrium with quota P 2 0 A B Q0 C Q w S world Equilibrium with free trade. At P2

9 Quota- omestic Impact Producer 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. P1 P 3 P 2 0 A B Q0 C Q w Quota S 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 =Sd Equilibrium with free trade. At P2

10 Subsidies applied to domestic goods to make them cheaper and more competitive with imports. w/subsidy P P 2 P 1 2 S world 0 Q0 C Q w

11 Subsidies omestic Impact omestic producers this decreases costs for domestic producers so they can compete with imports. Consumers pay same p as with free trade and receive same Q w/subsidy P P 2 0-Q0 produced domestically Q0-QW imported P 1 2 S world 0 Q0 C Q w

12 Alternative Forms of Protection Voluntary Export Restraints (VER) Exporting country agrees to a voluntary quota of exports into a second country Exchange Controls Government limits amount of foreign currency available to importers, or citizens traveling abroad, or companies investing abroad Import Licensing Form of rationing where the importer must obtain a license, or permission to import Administrative Barriers Safety, health or environmental requirements Other forms of red-tape obstacles

13 Arguments for Protectionism Military self-sufficient Infant Industry Protect developing industry in LCs eclining Industries Allow firms a period of protection Protecting Employment Anti-umping umping: product exported at a price below production costs

14 Arguments Against Protectionism The reading does an excellent job of presenting this material, what do you think? HIGHER PRICES Poor Resource Allocation

WJEC (Eduqas) Economics A-level Trade Development

WJEC (Eduqas) Economics A-level Trade Development Topic 1: Global Economics 1.2 Free trade and protectionism Notes The benefits and costs of free trade Free trade is the act of trading between nations