1. Trade and Protectionism
A2 Economics revision presentation on aspects of protectionism in international trade

2. Main methods of trade barriers / import controls
Tariffs (import duties) - import taxes
Quotas - quantitative limits on the level of 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 - governments grants importers the license to import goods
Exchange controls - limiting the amount of foreign exchange that can move between countries. The UK abolished foreign exchange controls in October 1979

3. Is There An Economic 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
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 in particular industries
Desire to increase government revenue
Attempt to encourage import substitution

4. 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, but in the longer term, persistent undercutting of domestic prices will force the domestic industry out of business and allow the foreign firm to establish itself as a monopoly
The World Trade Organisation allows a government to act against dumping where there is genuine ‘material’ injury to the competing domestic industry

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

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

7. Import Tariffs – Import Volumes are Reduced
Domestic Supply
Price
Pw + Tariff
World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

8. Import Tariffs – Revenue for the Government
Domestic Supply
Price
Revenue from Tariff
Pw + Tariff
World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

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

10. Further Distortions to Trade – Non-Tariff Barriers
Non-Tariff Barriers (NTB) proliferate even when standard tariff barriers have been reduced / eliminated
Examples:
Different legal and technical standards between countries
Export Subsidies
Government procurement policies favouring domestic firms
Research and development subsidies
Different labour market regulations
Language barriers are also effectively a non-tariff barrier – particularly in industries where personal communication is important (e.g. when consumers are buying financial services)

11. Summary of import control effects
Intervention Type
Effect on (domestic) quantity traded
Effect on (domestic) consumer surplus
Effect on (domestic) producer surplus
Effect on Government Budget Finances
Is a deadweight loss of welfare created?
Production
Quotas
Falls;
Excess
Supply
Falls
Rise or
Fall
Zero
Yes
Import Tariffs
Rises
Positive
Import Quotas

12. 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. They penalise foreign producers and encourage the inefficient allocation of resources both domestically and globally.
There are no rich closed economies.
DTI Policy on International Trade

13. Emergence of Regional Trading Blocs

14. 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)