IGCSE Economics Unit D: The Global Economy Topic 2 Free Trade and Protectionism

Outline Protectionism Various protectionist methods Arguments in favor of protectionism Arguments against protectionism

Protectionism Barriers to international trade adopted by the government to protect the domestic industry. Protectionist measures include tariff and non-tariff barriers.

Barriers to trade Tariffs Non-Tariff Barriers (NTB) A tariff is a tax on imports. Non-Tariff Barriers (NTB) Non-tariff barriers, unlike tariffs are less direct protectionist measures, which are used to reduce the volume of imports.

Non- Tariff Barriers (NTBs) Quotas A limit on the quantity that could be imported. Note that the effects of tarriffs and quotas are different in that no Government revenue is usually produced by Quotas.

Non- Tariff Barriers (NTBs) Excessive customs formalities Complex and excessive customs formalities delay the imports of goods. VER Voluntary export restraints are bilateral agreements whereby one country voluntarily agrees to restrict the volume of its exports to the other country.

Non- Tariff Barriers (NTBs) Excessive standard requirements These could be health and safety standards, or other standard requirements. In this case, imports are restricted by imposing high standards that could only be met with difficulty by the exporters.

Non- Tariff Barriers (NTBs) Subsidies Subsidies are payments by the government to producers to lower the price of a good or service. Subsidies lower the price of domestic goods and encourage consumers to buy them instead of imports.

Domestic firms gain revenue More employment in domestic industry The effect of a subsidy given to domestic producers Domestic firms gain revenue More employment in domestic industry No effects on consumers (Price remains the same) Government spending on the subsidy (opportunity cost) Taxpayers pay for this subsidy Misallocation of resources as more is produced by inefficient domestic producers and less by efficient foreign producers

Arguments for protectionism To support infant industries An infant industry is an industry in its early stages of development. Protecting a newly formed industry through trade barriers will shield it from competition and allow it to mature. For strategic reasons It would be unadvisable to overly rely on food imports as they could be threatened at times of war.

Arguments for protectionism Protect jobs in “sunset industries”. Industries declining will lead to structural unemployment. This process could be slowed down enough for retraining and job creation in other areas. But once there is protectionism it is often politically difficult to reduce this help over time, so large amounts are spent propping up inefficient industries.

Arguments for protectionism To improve the balance of payments The balance of payment is a set of accounts recording the earnings from exports and capital inflows as well as payments for imports and capital outflows. When the outflows of foreign currency exceed the inflows, the balance of payment is in deficit. Protectionist measures reduce the amount of imports and may result in an improvement in the balance of payment.

Arguments for protectionism To prevent Dumping Dumping refers to exporting goods at a lower price than the price for which the good is sold in the home country. Dumping occurs when a good is sold at a price lower than its cost of production protectionist measures could be imposed as an anti-dumping prevention

Arguments against protectionism Uncompetitive industries Shielding the domestic industry from competition may lead to a decline in efficiency. Domestic firms will not keep up with technological advancements and may become less competitive in international markets.

Arguments against protectionism Retaliation The imposition of tariffs and other forms of protectionism exposes the country to retaliation from trading partners. Exports may decrease as trading partners retaliate by imposing tariffs on the country’s exports.

Arguments against protectionism Consumers suffer: Less choice and higher prices Domestic firms that rely on imports for raw materials and components have to pay higher prices so they suffer

Arguments against protectionism Government spending on subsidising domestic producers is expensive and has to be financed by higher taxes Higher price of imports may lead to increased costs for businesses and so cost- push inflation.

Arguments against protectionism (Empirical) evidence suggests that countries that rely on protectionism achieve lower standards of living. Countries like Singapore that embrace globalisation and free trade see living standards rapidly grow