Wider consumer choice and lower prices due to increased competition Firms have access to larger markets, can gain economies of scale, and have access to cheaper raw materials Access to resources and products they may not have available in their own country eg. oil Specialisation and trade increases world output and raises the standard of living Political Reasons- historical links or strategic reasons
TRADE PROTECTION Arguments for protection /restricting trade To combat foreign trade monopoly To protect the way of life To suppress the consumption of luxuries Maintaining a domestic defence supply industry Protection of infant industries Raising government revenue Strategic trade policy To combat the threat of dumping To combat cheap foreign labour Second best Strategic reasons Poor reason – not sustainable if a genuine cost advantage. Best argument for protection ?
Forms of trade protection (barriers to trade) Tariff – A charge imposed to inflate the price of imports relative to domestically produced goods. Eg. US tariffs on steel 2002 Export subsidy – subsidising product sales of domestic producers, when competing in the world market, to encourage exports. Eg. CAP, dairy subsidies Quota – restriction on quantity of goods imported to maintain domestic production eg. EU imposing textile/ clothing quotas on Chinese imports 2005. 2006 EU placed import quota on Thai chicken Non tariff barriers - administrative regulations that discriminate against foreign goods in favour of home produced goods. Embargo – Total ban of trade on specific goods or in certain cases total ban on trade. Eg. Cuba- 50 year trade embargo on US goods, 2006 Thailand banned EU chicken imports fear of H5N1 bird flu virus
Why use a tariff? Does not need to be supported by gov. spending (unlike a subsidy) Can provide revenue for a gov, enabling possible domestic tax cuts. Politicians have often tended to respond to high imports by imposing a tariff as a way of reducing imports from foreign producers. A tariff can be seen, politically, as an easier option. Note: Membership of the WTO (formerly GATT) has significantly reduced the use of tariffs. Non-tariff barriers (NTBs) are now more common, however many are also against WTO rules.
Tariff protection S world Pw Q1Q1 Q2Q2 S w + tariff PtPt Q3Q3 Q4Q4 bhci Quantity of good x Price of good x S domestic D uk Tariff Rate afgj
Outcomes of using a tariff Domestic consumers lose consumer surplus (b+c+h+i) Domestic producers supported (higher market price) Increased domestic producer surplus of b Rise in domestic producer revenue from a to abcf Reduction in foreign producer revenue from fgj to g Gov revenue raised (h) Q1 to Q3 now produced by domestic firms for c+f revenue, foreign producers supplied same amount for f (c represent inefficiency) Q4 to Q2 is now not demanded, j is kept by consumers, but i is lost consumer surplus not transferred elsewhere A tariff results in deadweight welfare loss of areas c and i there is a loss of economic efficiency as less efficient domestic producers are able to produce and consumers are restricted from accessing imports from more efficient world producers The effect will be dependent on the size of the tariff, the PES and PED in the domestic market. The wider effect will be determined by the impact on trade relationships and the responses by other governments and markets
Activity List the winners and losers of the EU imposing a tariff on bananas from Latin American countries What factors will affect the impact of the tariff? Why are tariffs popular with governments?
Quantity of good x Price of good x S domestic D uk Subsidy protection Q1Q1 Q2Q2 SwSw PwPw Q3Q3 P w + Subsidy S domestic + subsidy abc g f
Outcome of Using Subsidies A production subsidy would support domestic producers by increasing the price received by domestic producers to P w + subsidy Domestic Producer Revenue rises from a to afgb Cost of subsidy to gov is f+g The shaded area g represents the loss of economic efficiency generated by supporting less efficient domestic production (a deadweight loss of welfare) Foreign firms would have provided Q1 to Q3 for b revenue. Domestic firms require b+g for same output Consumer surplus is maintained, however, there will be a transfer from general tax revenue in spending required to support domestic production (opportunity cost of foregone publically funded goods)
Activity Winners and losers from the US subsidising cotton What factors will affect the impact of a subsidy?
Quick Quiz Illustrate and explain the impact of a subsidy used as protectionism (4 marks) Using the diagram explain how domestic producers gain and foreign producers lose out (4 marks)
Quota protection SwSw PwPw Q1Q1 Q2Q2 PqPq Q4Q4 Q3Q3 Quantity of good x Price of good x S domestic D uk S domestic + quota a g j cbf h i lk
Outcome of Quotas Domestic producers supply Q1 plus Q3 to Q4 at price pq Domestic producer revenue rises from a to a+g+c+j+k Foreign producers supply less now Q1 to Q3, previously Q1 to Q2, at a price of pq. Producer revenue changes from bcf to bhi (usually a fall in income) Q4 to Q2 is no longer demanded, f is kept by consumers but l is a deadweight welfare loss as it is the loss of consumer surplus which does not get transferred to any other stakeholder Q3 toQ4 is now produced by domestic firms. Foreign producers would have supplied this amount for c revenue, but domestic firms require min ck, therefore k represents inefficiency of domestic producers and loss of world efficiency. Another deadweight welfare loss.
Activity Winners and Losers- EU imposing a quota on chicken from Thailand (2006) What factors affect the outcome of the quota?