Ch'21 Protectionism

1
Ch.21 Protectionism

• Protectionism means the protection of domestic
  industries from foreign competition through
  various kinds of trade restriction policies.
• When protection is practised, there is no free
  trade.
• Hence, protectionism violates the Principle of
  Comparative Advantage.
• China joining WTO removal of trade protection

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21.1 Methods of Trade Restriction
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P.174 Tariff??

• A tax imposed??on imported goods
• unit tax or ad valorem (percentage) tax
• Import surcharges An additional import tax
  besides normal tariff
• Its effects are
• increase the price of the imported goods so that
  they become less competitive,
• raise revenue for the government.

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Effective in reducing Qd if the demand for
foreign goods is elastic
/Q
/Q
S
S
Delastic
Dinelastic
Q
Q
When demand is more elastic (1) Price rises
less. (2) The government takes in less revenue.
Equal Pretax Sales
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P.174 Import quotas??

• a maximum??limit??placed on the amount of goods
  that may be imported within a given period,
  usually a year
• directly regulates the quantity of imports

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Quota
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Elasticity of demand TE on imports
()
(-)
Econ in use 21.1
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P.176 Voluntary export restriction

• The exporting country (e.g. China Hong Kong)
  restricts its own exports (e.g. garments) to some
  other countries (e.g. USA).

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P.176 Subsidies??

• The government subsidizes the production of local
  goods so as to keep their market prices at a
  relatively low level.
• Hence, it is more difficult for foreign traders
  to export a similar product to that country.

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P.177 Embargo??

• A ban??on trade between two countries (e.g. USA
  Iraq)
• may be total??(a ban on all goods), or partial (a
  ban on certain categories??of goods)
• used as a political weapon

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P.178 Exchange control????

• The monetary authority imposes a limit on the
  supply of foreign??currencies??, and this can
  indirectly control??the amount of imports.

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• 9. A tariff increases the
• a. quantity of imports.
• b. ability of foreign goods to compete with
  domestic goods.
• c. prices of imports to domestic buyers.
• d. all of the above.

C. A tariff is a tax, also called customs
duties, on an import.
21.2 Reasons for restricting??trade
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P.179 Cheap foreign labour produce cheap imports
that may cause job losses and lower wages.

• Limitations why this is not a reason?
• Trade between high-income and low-income
  countries depends on comparative advantages
• Cheap imports are desirable
• High local wage level may reflect high
  productivity

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P.179 To protect local industries so as to ensure
more job opportunities

• Limitations why this is not a reason?
• Retaliation gt There is a decrease in foreign
  demand for that countrys exports gt Unemployment
  will not be reduced but only redistributed among
  industries
• Protective policies discourage international
  specialization, resources are allocated
  inefficiently, leading to a reduction in world
  output

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P.180 Diversification of industries in order to
reduce risks and instability associated with
over-reliance on a few products or markets

• Limitations why this is not a reason?
• It violates the principle of comparative
  advantage which causes misallocation of
  resources.
• Free trade gives greater variety of goods to
  consumers

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• P.180 The Infant-Industry Argument
• It is necessary to protect a new industry to
  enable it to grow into a mature industry that can
  compete in world markets.
• Infant??industry argument temporary trade
  restrictions help industries get started so
  domestic firms can compete in world markets.

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• P.181 Infant Industry Argument
• The contention that tariffs should be imposed to
  protect an industry that is trying to get started
  from import competition
• Presumably, after the industry becomes
  technologically efficient, the tariff can be
  lifted.

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To protect infant industries

• Limitations why this is not a reason?
• Failure to consider present losses
• Uncertainty of profit in the future
• Difficult to identify which industry has
  potential to grow
• Difficult to remove the protection in the future

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P.181 Bring revenue to government

• Consumers will be the ones who bear the burden of
  tariffs.

National defense argument

• A country must protect industries that produce
  defense equipment and armaments and those on
  which the defense industries rely for their raw
  materials and other intermediate inputs.

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The Case Against Protection

• The National Security Argument
• Limitations why this is not a reason?
• How to identify strategic industries?

Real World Example
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• 10. The infant industry argument for
  protectionism is based on which of the following
  views
• a. foreign buyers will absorb all of the output
  of domestic producers in a new industry.
• b. the growth of an industry that is new to a
  nation will be too rapid unless trade
  restrictions are imposed.
• c. firms in a newly developing domestic industry
  will have difficulty growing if they face strong
  competition from established foreign firms.
• d. it is based on none of the above.

C. It is difficult to make this argument because
there is an arbitrary line between an infant
and a grown up industry.