1. Protectionism
Section 3.1

2. Outline Protectionism The effect of a tariff on imports
The effect of tariffs on social welfare
Various protectionist methods
Arguments in favor of protectionism
Arguments against protectionism

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

4. 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.

5. The effect of a tariff on imports
The imposition of the tariff reduced imports from Qs1-Qd1 to Qs2-Qd2 P S
Pw + tariff Pw Sw D Q
Qs1
Qs2
Qd2
Qd1
imports

6. Consumer surplus
The consumer surplus is the difference between the maximum price that consumers are willing to pay and the price that they actually pay. P S Pe D Q

7. Producer surplus
The producer surplus is the difference between the minimum price that producers are willing to charge and the price that they actually charge. P S Pe D Q

8. The effect of a tariff on welfareP S
Pw + tariff
Consumer surplus Pw Sw D Q
Qs1
Qs2
Qd2
Qd1
imports

9. The effect of a tariff on welfareP S
The imposition of the tariff reduces the consumer surplus
Consumer surplus
Pw + tariff Pw Sw D Q
Qs1
Qs2
Qd2
Qd1
imports

10. The effect of a tariff on welfare
Area a: increase in producer surplus due to tariff
Area c: government tariff revenue
Areas b and d: dead-weight loss to society due to tariff P S
Consumer surplus
Pw + tariff a c b d Pw Sw D Q
Qs1
Qs2
Qd2
Qd1
imports

11. 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. Thus the domestic welfare loss of a quota is greater

12. The effects of a Quota ABCD= loss of consumer surplus
A= gain in producer surplus
BCD is net welfare loss to domestic economy
S+ Quota

13. Quotas (continued)
The Government could gain revenue by issuing licenses to importers. Maybe therefore area C could be transferred to the Government.
If this is not the case area C is actually the gain in revenue that some importers gain from now getting a higher price for their goods. Thus it is a net loss to the domestic economy

14. 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.

15. 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.

16. 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.

17. The effect of a subsidy given to domestic producers
A subsidy reduces imports from Qs1-Qd1 to Qs2-Qd1
Cost of subsidy is shaded area. Blue triangle is welfare loss due to subsidy (the rest is increase in producer surplus P s1 S Pw Sw D Q
Qs1
Qs2
Qd1
imports

19. 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

20. 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.

21. 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.

22. 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.

23. Arguments for protectionism
To avoid overspecialization
Producing only those goods in which a country has a comparative advantage in, may result in being too dependent on few goods or services.
e.g. Many south American countries were hit hard by the plummeting coffee prices due to their economies’ reliance on this crop.

24. 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

25. Arguments against protectionism
Protectionism results in a net loss in social welfare
The loss in consumer surplus, which results from the higher import prices and the reduced consumption exceeds the gain in producer surplus, which results from the higher price and the increased production and the gain in tariff revenues to the government.

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

27. 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.