1. Trade and Protectionism
A2 Economics Presentation
2006
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2. Main methods of trade barriers
Tariffs (import duties) - import taxes
Quotas – volume limits imports allowed
Voluntary Export Restraint Arrangements
Embargoes - a total ban on imported goods
Subsidies - a government payment to encourage domestic production by lowering their costs
Import licensing
Exchange controls - limiting the amount of foreign exchange that can move between countries

3. Rationale for Import Controls
Changing comparative advantage
Infant-Industry Argument
Balance of Payments Adjustment
Desire to control the growth of imports to improve the trade balance
Response to “Dumping”
Predatory pricing by overseas suppliers
Off-loading of excess capacity at below cost-price

4. Rationale for Import Controls
Employment protection
Fear of structural unemployment in declining sectors (I.e. occupational immobility of labour and capital)
Social costs of unemployment resulting from increased import penetration
Desire to increase government revenue
Attempt to encourage import substitution

5. Dumping
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product
In the short term, consumers benefit from the low prices of the foreign goods
In the longer term, persistent undercutting of domestic prices will force the domestic industry out of business and allow the foreign firm to establish a monopoly
The World Trade Organisation allows a government to act against dumping where there is genuine ‘material’ injury to the competing domestic industry

6. Import Tariffs – Economic Effects
Domestic Supply
Price
World Price Pw
Imports
Domestic Demand Qs Qd
Output (Q)

7. Consumers Pay Higher Prices
Domestic Supply
Price
Pw + Tariff
World Price Pw
Imports
Domestic Demand Qs Qd
Output (Q)

8. Import Tariffs Domestic Supply Price Pw + Tariff World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

9. Tariffs – Revenue Domestic Supply Price Revenue from Tariff
Pw + Tariff
World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

10. The Case Against Import Controls
Protection is a ‘second best’ approach to controlling trade flows and improving the BoP
Welfare losses for consumers (i.e. higher prices)
World multiplier effects from reduction in trade
Threat of retaliation “beggar thy neighbour policies”
Import controls cushions “X” inefficiency – in this sense, import controls act as a “barrier to entry” in a market
Bureaucratic cost of administering import controls

11. Non-Tariff Barriers
Non-Tariff Barriers (NTBs) proliferate even when standard tariff barriers have been reduced / eliminated
Examples:
Different legal and technical standards
Export Subsidies
Government procurement policies favouring home firms
Research and development subsidies
Different labour market regulations
Language barriers

12. Summary of import control effects
Intervention Type
(domestic) quantity traded
Effect on consumer surplus
Effect on (domestic) producer surplus
Effect on Budget Finances
Production
Quotas
Falls;
Excess
Supply
Falls
Rise or
Fall
Zero
Import Tariffs
Rises
Positive
Import Quotas

13. DTI on the “folly of protectionism”
The folly of protection has been confirmed by a range of studies from around the world. These indicate that that it has brought few benefits but imposed substantial costs.
Protection has proved an ineffective means of sustaining employment. Trade barriers in the form of tariffs distort domestic markets, pushing up the prices faced by consumers and insulating inefficient sectors from competition
There are no rich closed economies
DTI Policy on International Trade

14. WTO on the benefits of fair trade
The largest share of benefits from liberalization typically goes to the country that liberalizes.
Most developing countries would gain from a broader market access package of trade liberalization.
If tariffs are eliminated completely, the range of estimated economic benefits (“welfare gains”) is $80–$500 billion. Estimates of the share going to developing countries are in the range 40–60%

15. 50 years of tariff reductions
GATT/WTO: 50 years of tariff reductions
Tariff reduction of industrial countries for industrial products, excluding petroleum
Implementation period
Round covered
Weighted tariff reduction
1948–63
First five GATT rounds (1947–62) 
–36
1968–72
Kennedy Round (1964–67) 
–37
1980–87
Tokyo Round (1973–1979) 
–33
1995–99
Uruguay Round (1986–94) 
–38
Note: Tariff reductions for the first five trade rounds refer to US only

16. Regional Trading Agreements
The European Union
The European Free Trade Association (EFTA)
The North American Free Trade Agreement (NAFTA)
The Southern Common Market (MERCOSUR)
The Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)
The Common Market of Eastern and Southern Africa (COMESA)