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Tutor2u ™ Trade and Protectionism A2 Economics Presentation 2006.

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Presentation on theme: "Tutor2u ™ Trade and Protectionism A2 Economics Presentation 2006."— Presentation transcript:

1 tutor2u ™ Trade and Protectionism A2 Economics Presentation 2006

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 Price Output (Q) Domestic Demand Domestic Supply World Price QdQs Pw Imports

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

8 Import Tariffs Price Output (Q) Domestic Demand Domestic Supply World Price QdQs Pw Pw + Tariff Qd2Qs2 M

9 Tariffs – Revenue Price Output (Q) Domestic Demand Domestic Supply World Price QdQs Pw Pw + Tariff Qd2Qs2 Revenue from Tariff M

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 FallsRise or Fall Zero Import TariffsFalls RisesPositive Import QuotasFalls RisesZero

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 Implement ation period Round coveredWeighted tariff reduction 1948–63First five GATT rounds (1947–62) – –72Kennedy Round (1964– 67) – –87Tokyo Round (1973– 1979) – –99Uruguay 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)

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