© Pilot Publishing Company Ltd Chapter 11 International Trade II --- Protectionism

© Pilot Publishing Company Ltd Contents: Reasons for protectionism Economic effects of tariff and quota Differences between tariff and quota

© Pilot Publishing Company Ltd Reasons for Protectionism

© Pilot Publishing Company Ltd Protectionism What is protectionism? to restrict international trade and to protect a countrys own interest is the arguments for and the actions of imposing measures

© Pilot Publishing Company Ltd Non-economic reasons 1. Protect strategic industries that are essential to the security and survival of the country 2. Protect industries that are regarded as symbols of progress and development 3. Prohibit the trading of harmful goods like drugs 4. Prevent the export of advanced technology 5. Set up economic sanctions for political reasons

© Pilot Publishing Company Ltd Economic reasons 1. Protect infant industries temporarily 2. Provide a transitional period for the industrial base to change 3. Fight against dumping 4. Prevent over-concentration by diversification 5. Correct market distortion 6. Deter foreign protectionist measures 7. Improve the terms of trade

© Pilot Publishing Company Ltd Misconceptions Trade is a zero-sum game that a countrys gain is the others loss (being exploited). A country will lose money and job opportunities in buying foreign products instead of domestic products. If foreign wage rates are lower than domestic wage rates, under competition, local workers will have to lower their wage rates and living standard. Import restriction is an effective and efficient means to lower the unemployment rate. Free trade benefits everyone.

© Pilot Publishing Company Ltd Conclusion Free trade is better than no trade as it raises the worlds output and brings many other benefits to the trading countries. However, restricted trade is sometimes more beneficial than free trade to the country practising protectionism.

© Pilot Publishing Company Ltd Means of Protection a tax imposed on imports to raise their prices Quota Subsidies on exports or import-competing industries Tariff a maximum quantity limit on imports to improve their competitiveness.

© Pilot Publishing Company Ltd Exchange control Embargo a ban on trade Exporters have to sell their foreign currencies earned to the monetary authority at fixed exchange rate while importers have to apply from the authority for using foreign currencies in external payments.

© Pilot Publishing Company Ltd Economic Effects of Tariff and Quota

© Pilot Publishing Company Ltd Producers surplus Consumers surplus The situation without trade (the autarky situation) P Q Domestic supply under autarky Domestic demand PdPd Q1Q1 0 Total surplus

© Pilot Publishing Company Ltd The situation with free trade P Q Domestic supply under autarky Domestic demand PdPd Q1Q1 0 CO 0 Import PwPw PO 0 Domestic supply with free trade

© Pilot Publishing Company Ltd New total surplus ( ) New producers surplus ( ) New consumers surplus ( ) P Q Domestic supply under autarky Domestic demand PdPd Q1Q1 0 CO 0 Import PwPw PO 0 Domestic supply with free trade

© Pilot Publishing Company Ltd Old total surplus (without trade) New total surplus with trade ( ) P Q Domestic supply under autarky Domestic demand PdPd Q1Q1 0 CO 0 Import PwPw PO 0 Domestic supply with free trade Gain from free trade

© Pilot Publishing Company Ltd P Q Domestic supply under autarky Domestic demand PdPd PO 0 0 Domestic supply with free trade New import The situation after the imposition of tariff Domestic supply with tariff CO 1 PO 1 CO 0 PwPw P w + t

© Pilot Publishing Company Ltd P Q Domestic supply under autarky Domestic demand PdPd PO 0 0 Domestic supply with free trade New import ( ) The situation after the imposition of tariff Domestic supply with tariff CO 1 PO 1 CO 0 PwPw P w + t New consumers surplus ( ) New producers surplus ( ) Government revenue = Tariff x Amount imported

© Pilot Publishing Company Ltd Total surplus with free trade P Q Domestic supply under autarky Domestic demand PdPd Q1Q1 0 CO 0 Import PwPw PO 0 Domestic supply with free trade Compared with the situation with free trade

© Pilot Publishing Company Ltd P Q Domestic supply under autarky Domestic demand PdPd PO 0 0 Domestic supply with free trade New import Domestic supply with tariff CO 1 PO 1 CO 0 PwPw P w + t Deadweight loss under tariff Deadweight losses

© Pilot Publishing Company Ltd New CS + PS P Q Domestic demand PdPd 0 Domestic supply under autarky The situation after the imposition of quota Domestic supply with free trade Domestic supply with quota PO 0 PO 1 CO 1 CO 0 QuotaNew import

© Pilot Publishing Company Ltd Additional loss if the quota is allocated by non-price method P Q Domestic demand PdPd 0 Domestic supply with quota Domestic supply with free trade PO 0 Deadweight losses PO 1 CO 1 CO 0 Domestic supply under autarky New import

© Pilot Publishing Company Ltd Other effects 1. Quality of products is improved 2.Wealth redistribution The one who gains in domestic country – import-competing industries; government; society The one who loses in domestic country – consumers The one who gains in foreign country – consumers The one who loses in foreign country – export industries; society

© Pilot Publishing Company Ltd Differences between Tariff and Quota

© Pilot Publishing Company Ltd TariffQuota Nature A taxA quantity restriction Wealth redistribution Raises the government revenue Does not raises the government revenue unless it is auctioned off by the government Amount of imports A variable depending on the elasticity of domestic demand for imports Fixed

© Pilot Publishing Company Ltd TariffQuota Deadweight losses Loss in the gain from trade (CO ) and loss from extra cost (PO ) Additional loss if the quota is allocated by non-price method Market power of domestic producers Domestic producers cannot raises the domestic price Domestic producers may raises the domestic price by reducing their output Result of changes in market situations The amount of imports is variable The amount of imports is fixed

© Pilot Publishing Company Ltd Correcting Misconceptions: 1. Import restriction reduces the amount of imports and raises the terms of trade. 2. Free trade is better than no trade and restricted trade. 3. Buying domestic products instead of foreign products keeps both money and jobs in the domestic country.

© Pilot Publishing Company Ltd Free trade is beneficial to everyone. 5. The imposition of a tariff and a quota brings the same results to an economy. Correcting Misconceptions: