Presentation is loading. Please wait.

Presentation is loading. Please wait.

Trade and Protectionism

Similar presentations

Presentation on theme: "Trade and Protectionism"— Presentation transcript:

1 Trade and Protectionism
A2 Economics Presentation 2006 tutor2u™

2 Main methods of trade barriers
Tariffs (import duties) - import taxes Quotas – volume limits 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 Exchange controls - limiting the amount of foreign exchange that can move between countries

3 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

4 Rationale for Import Controls
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 Desire to increase government revenue Attempt to encourage import substitution

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

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

7 Consumers Pay Higher Prices
Domestic Supply Price Pw + Tariff World Price Pw Imports Domestic Demand Qs Qd Output (Q)

8 Import Tariffs Domestic Supply Price Pw + Tariff World Price Pw
Domestic Demand M Qs Qs2 Qd2 Qd Output (Q)

9 Tariffs – Revenue Domestic Supply Price Revenue from Tariff
Pw + Tariff World Price Pw Domestic Demand M Qs Qs2 Qd2 Qd Output (Q)

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

11 Non-Tariff Barriers Non-Tariff Barriers (NTBs) proliferate even when standard tariff barriers have been reduced / eliminated Examples: Different legal and technical standards Export Subsidies Government procurement policies favouring home firms Research and development subsidies Different labour market regulations Language barriers

12 Summary of import control effects
Intervention Type (domestic) quantity traded Effect on consumer surplus Effect on (domestic) producer surplus Effect on Budget Finances Production Quotas Falls; Excess Supply Falls Rise or Fall Zero Import Tariffs Rises Positive Import Quotas

13 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 There are no rich closed economies DTI Policy on International Trade

14 WTO on the benefits of fair trade
The largest share of benefits from liberalization typically goes to the country that liberalizes. Most developing countries would gain from a broader market access package of trade liberalization. If tariffs are eliminated completely, the range of estimated economic benefits (“welfare gains”) is $80–$500 billion. Estimates of the share going to developing countries are in the range 40–60%

15 50 years of tariff reductions
GATT/WTO: 50 years of tariff reductions Tariff reduction of industrial countries for industrial products, excluding petroleum Implementation period Round covered Weighted tariff reduction 1948–63 First five GATT rounds (1947–62)  –36 1968–72 Kennedy Round (1964–67)  –37 1980–87 Tokyo Round (1973–1979)  –33 1995–99 Uruguay Round (1986–94)  –38 Note: Tariff reductions for the first five trade rounds refer to US only

16 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)

Download ppt "Trade and Protectionism"

Similar presentations

Ads by Google