2. Trade protectionism1

3. 2 What is Protectionism? Trade protectionism is the policy that restricts the volume of ______ and, in particular, the volume of ________. Measures: 1. Tariffs 2. Import quota 3. Voluntary export restraint programmes 4. Production subsidies 5. Embargoes 6. Foreign exchange control trade imports

4. Trade protectionism3 $50 $100 Customs Tariff Tariffs  A tariff is a tax on _____________.  On an _________ basis or a ________ basis. § An extra tax on top of the regular tariff is called an _______________. imported goods per unitad valorem import surcharge

5. Trade protectionism4 What are the economic effects of tariffs? § The price of imports will _______. Price ($) Imports D S0S0 P0P0 Q0Q0 Q1Q1 t P1P1 § The amount of imports will ________. Amount of tariff revenue = ______________________________ increase decrease tariff rate × the quantity imported S1S1

6. Trade protectionism5 Import Quota The _________ limit on the quantity of goods that can be ___________ a country. maximum imported into Customs No more quota! HK

7. Trade protectionism6 What are the economic effects of a quota? § Part of the supply curve becomes ________ at the quota limit. § The price of imported goods _________. § The amount of imports ________. vertical decreases increases Price ($) Imports D S0S0 P0P0 Q0Q0 S1S1 P1P1 Q1Q1

8. Trade protectionism7 § The effect on the total expenditure on imported goods is ________, depending on the _______ _________ for imports. Price ($) Imports D S0S0 P0P0 Q0Q0 S1S1 P1P1 Q1Q1 uncertain elasticity § If the demand for imports is inelastic, total expenditure will ________. increase What are the economic effects of a quota? of demand Increase in total expenditure Decrease in total expenditure

9. Trade protectionism8 Voluntary Export Restraint Programmes  Importing country sets a limit on the __________ export volume for the exporting country.  Below this limit, the imported goods will be taxed at a _______ tariff rate.  If the limit is exceeded, the extra imports will be taxed at a much _______ tariff rate.  It is voluntary in the sense that the exporting country can ______ decide the amount of exports given the tariff structure imposed by the importing country. maximum lower higher freely

10. Trade protectionism9 Production Subsidies  Subsidies to the local producers lower the _______________ and the ______ of the locally produced goods. Effects:  Since locally produced goods and foreign goods are _________ for each other, the demand for imports will ________.  Therefore, the volume of imports will ________. cost of productionprice substitutes decrease

11. Trade protectionism10 Embargoes  A _____ on trade.  Can be either a _____ embargo or a ______ embargo. ban totalpartial Total embargoPartial embargo The ban in ivory products Ivory products No ivory products Embargo imposed by the UN on Iraq Iraq

12. Trade protectionism11 Foreign Exchange Control  The government controls the ____________ and the availability of ________________. exchange rate foreign currencies Foreign currencies on market Exchange rate $A / US$ $A / Euro 1 1.1

13. Trade protectionism12 Effects:  More difficult and costly for importers to obtain ________________. foreign currencies  As _____ foreign currency is available to pay for foreign goods, import will ________. less decrease Foreign Exchange Control

14. Trade protectionism13 Quiz One A tariff restricts the price of imports only while a quota restricts the quantity of imports only. A tariff _______ the prices and ______ the quantity of imports; a quota _______ the supply and _______ the prices of imports. raiseslowers reduces raises True / False. Explain whether this statement is correct or not.

15. Trade protectionism14 Quiz Two To restrict the amount of imports, using a quota is more effective than imposing a tariff. Why? The amount of reduction in imports by tariff depends on the ___________________ ______ whereas the import quota directly restricts the _________ amount of imports. elasticity of demand for maximum imports

16. Trade protectionism15 Quiz Three If the government increases the amount of per- unit tariff, the tariff revenue will increase. Explain whether this statement is correct or not.

17. Trade protectionism16 Price ($) Quantity D S0S0 P0P0 Q0Q0 S1S1 S2S2 Gain in tariff revenue Loss in tariff revenue S 0 : supply curve before tariff S 1 : supply curve after imposing the original tariff S 2 : supply curve after imposing the new (higher) tariff Quiz Three P1P1 P2P2 Q1Q1 Q2Q2

18. Trade protectionism17 Quiz Three The effect of increasing the per-unit tariff amount depends on the gain in total tariff revenue due to ______________ ______________ and the loss in tariff revenue due to __ ______ _________________. an increase in the tariff rate a smaller Price ($) Quantity D S0S0 P0P0 Q0Q0 S1S1 S2S2 P1P1 P2P2 Q1Q1 Q2Q2 quantity imported Gain in tariff revenue Loss in tariff revenue

19. Trade protectionism18 Quiz Three If the demand for imports is inelastic, the gain in tariff revenue will be _______ than the loss in tariff revenue and the total tariff revenue will ________, vice versa. greater Price ($) Quantity D S0S0 P0P0 Q0Q0 S1S1 S2S2 P1P1 P2P2 Q1Q1 Q2Q2 increase Gain in tariff revenue Loss in tariff revenue End