Download - 3 Protectionism
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Copyright2004 South-Western
9Application:
International Trade
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Copyright 2004 South-Western/Thomson Learning
The Effects of a Tariff
A tariff is a tax on goods produced abroad and
sold domestically.
Tariffs raise the price of imported goods above
the world price by the amount of the tariff.
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
Price
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supply
Domestic
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Importswithout tariff
Equilibrium
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Price
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World
priceImports
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QS
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QD
QD
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
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Producer
surplus
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Consumer surplus
before tariff
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
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after tariff
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
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of Steel
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Tariff Revenue
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
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Deadweight Loss
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The Effects of a Tariff
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The Effects of a Tariff
A tariff reduces the quantity of imports and
moves the domestic market closer to its
equilibrium without trade.
With a tariff, total surplus in the marketdecreases by an amount referred to as a
deadweight loss.
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The Effects of an Import Quota
An import quota is a limit on the quantity of a
good that can be produced abroad and sold
domestically.
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Figure 7 The Effects of an Import Quota
Copyright 2004 South-Western
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of Steel
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supply
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supply
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price with
quota
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QD
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price
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quota=
QS
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The Effects of an Import Quota
Because the quota raises the domestic price
above the world price, domestic buyers of the
good are worse off, and domestic sellers of the
good are better off. License holders are better off because they
make a profit from buying at the world price
and selling at the higher domestic price.
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Figure 7 The Effects of an Import Quota
Copyright 2004 South-Western
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+Import supply
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without tradeQuota
Imports
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QD
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quota=
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The Effects of an Import Quota
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The Effects of an Import Quota
With a quota, total surplus in the marketdecreases by an amount referred to as a
deadweight loss.
The quota can potentially cause an even largerdeadweight loss, if a mechanism such as
lobbying is employed to allocate the import
licenses.
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The Lessons for Trade Policy
If government sells import licenses for fullvalue, revenue equals that of an equivalent
tariff and the results of tariffs and quotas are
identical.
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The Lessons for Trade Policy
Both tariffs and import quotas . . .
raise domestic prices.
reduce the welfare of domestic consumers.
increase the welfare of domestic producers.
cause deadweight losses.
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The Lessons for Trade Policy
Other Benefits of International Trade
Increased variety of goods
Lower costs through economies of scale
Increased competition
Enhanced flow of ideas
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THE ARGUMENTS FORRESTRICTING TRADE
Jobs
National Security
Infant Industry
Unfair Competition
Protection-as-a-Bargaining Chip
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CASE STUDY: Trade Agreements and theWorld Trade Organization
Unilateral: when a country removes its traderestrictions on its own.
Multilateral: a country reduces its trade
restrictions while other countries do the same.
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CASE STUDY: Trade Agreements and theWorld Trade Organization
NAFTA
The North American Free Trade Agreement
(NAFTA) is an example of a multilateral trade
agreement. In 1993, NAFTA lowered the trade barriers among
the United States, Mexico, and Canada.
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CASE STUDY: Trade Agreements and theWorld Trade Organization
GATT
The General Agreement on Tariffs and Trade
(GATT) refers to a continuing series of negotiations
among many of the worlds countries with a goal ofpromoting free trade.
GATT has successfully reduced the average tariff
among member countries from about 40 percent
after WWII to about 5 percent today.