© pilot publishing company ltd. 2005 chapter 11 international trade ii --- protectionism
TRANSCRIPT
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© Pilot Publishing Company Ltd. 2005
Chapter 11 International Trade II
--- Protectionism
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Contents:
• Reasons for protectionism
• Economic effects of tariff and quota
• Differences between tariff and quota
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Reasons for Protectionism
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Protectionism
What is protectionism?
to restrict international trade and
to protect a country’s own interest
is the arguments for and the actions of imposing measures
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Non-economic reasons
1. Protect strategic industries that are essential to the security and survival of the country
2. Protect industries that are regarded as symbols of progress and development
3. Prohibit the trading of harmful goods like drugs
4. Prevent the export of advanced technology
5. Set up economic sanctions for political reasons
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Economic reasons
1. Protect infant industries temporarily
2. Provide a transitional period for the industrial base to change
3. Fight against dumping
4. Prevent over-concentration by diversification
5. Correct market distortion
6. Deter foreign protectionist measures
7. Improve the terms of trade
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Misconceptions Trade is a zero-sum game that a country’s gain is the other’s loss (being exploited).
A country will lose money and job opportunities in buying foreign products instead of domestic products. If foreign wage rates are lower than domestic wage rates, under competition, local workers will have to lower their wage rates and living standard.
Import restriction is an effective and efficient means to lower the unemployment rate. Free trade benefits everyone.
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Conclusion
Free trade is better than no trade as it raises the world’s output and brings many other benefits to the trading countries.
However, restricted trade is sometimes more beneficial than free trade to the country practising protectionism.
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Means of Protection
a tax imposed on imports to raise their prices
Quota
Subsidies on exports or import-competing industries
Tariff
a maximum quantity limit on imports
to improve their competitiveness.
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Exchange control
Embargo a ban on trade
Exporters have to sell their foreign currencies earned to the monetary authority at fixed exchange rate while importers have to apply from the authority for using foreign currencies in external payments.
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Economic Effects of Tariff and Quota
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Producer’s surplus
Consumer’s surplus
The situation without trade (the autarky situation)
P
Q
Domestic supply under autarky
Domestic demand
Pd
Q10
Total surplus
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The situation with free trade P
Q
Domestic supply under autarky
Domestic demand
Pd
Q10 CO0
Import
Pw
PO0
Domestic supply with free trade
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New total surplus ()
New producer’s surplus ()
New consumer’s surplus ()
P
Q
Domestic supply under autarky
Domestic demand
Pd
Q10 CO0
Import
Pw
PO0
Domestic supply with free trade
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Old total surplus (without trade)
New total surplus with trade ()
P
Q
Domestic supply under autarky
Domestic demand
Pd
Q10 CO0
Import
Pw
PO0
Domestic supply with free trade
Gain from free trade
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P
Q
Domestic supply under autarky
Domestic demand
Pd
PO00
Domestic supply with free trade
New import
The situation after the imposition of tariff
Domestic supply with tariff
CO1PO1 CO0
Pw
Pw + t
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P
Q
Domestic supply under autarky
Domestic demand
Pd
PO00
Domestic supply with free trade
New import ()
The situation after the imposition of tariff
Domestic supply with tariff
CO1PO1 CO0
Pw
Pw + t
New consumer’s surplus ()
New producer’s surplus ()
Government revenue = Tariff x Amount imported
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Total surplus with free trade
P
Q
Domestic supply under autarky
Domestic demand
Pd
Q10 CO0
Import
Pw
PO0
Domestic supply with free trade
Compared with the situation with free trade
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P
Q
Domestic supply under autarky
Domestic demand
Pd
PO00
Domestic supply with free trade
New import
Domestic supply with tariff
CO1PO1 CO0
Pw
Pw + t
Deadweight loss under tariff
Deadweight losses
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New CS New CS + PS+ PS
P
QDomestic demand
Pd
0
Domestic supply under autarky
The situation after the imposition of quota
Domestic supply with free trade
Domestic supply with quota
PO0 PO1 CO1 CO0
Quota
New import
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Additional loss if the quota is allocated by non-price method
P
QDomestic demand
Pd
0
Domestic supply with quota
Domestic supply with free trade
PO0
Deadweight losses
PO1 CO1 CO0
Domestic supply under autarky
New import
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Other effects1. Quality of products is improved
2. Wealth redistribution The one who gains in domestic country –
import-competing industries; government; society The one who loses in domestic country – consumers
The one who gains in foreign country – consumers
The one who loses in foreign country – export industries; society
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Differences between Tariff and Quota
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Tariff Quota
Nature A tax A quantity restriction
Wealth redistribution
Raises the government revenue
Does not raises the government revenue unless it is auctioned
off by the government
Amount of imports
A variable depending on the
elasticity of domestic demand
for imports
Fixed
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Tariff Quota
Deadweight losses
Loss in the gain from trade (CO) and loss from extra cost (PO)
Additional loss if the quota is allocated by
non-price method
Market power of domestic producers
Domestic producers cannot raises the domestic price
Domestic producers may raises the
domestic price by reducing their output
Result of changes in market situations
The amount of imports is variable
The amount of imports is fixed
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Correcting Misconceptions:
1. Import restriction reduces the amount of imports and raises the terms of trade.
2. Free trade is better than no trade and restricted trade.
3. Buying domestic products instead of foreign products keeps both money and jobs in the domestic country.
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4. Free trade is beneficial to everyone.
5. The imposition of a tariff and a quota brings the same results to an economy.
Correcting Misconceptions: