6.2 Protectionism Flashcards
What is protectionism?
This is the act of guarding a countries industries from foreign competition. It can take the form of tariffs quotas regulations and embargoes.
What are the different tools of protectionism?
Tariffs
Import quotas
Export subsidies
Embargoes
Red tape - excessive administration burdens
What are tariffs and their impact?
They are taxes on imports to a country. It could lead to retaliation, so exports might decrease. The impact of tariffs is that the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases.
A tariff results in higher prices for consumers and a loss in consumer surplus
What is a quota?
It sets a physical limit on a specific imported good in a set amount of time. This causes a price increase in the good for domestic consumers, so they become worse off
What are import duties?
They are a tax on imports by the customers authority. It is usually on goods which exceed a specified quantity
What are export subsidies?
This is a form of government intervention to encourage goods to be exported rather than sold on the domestic market.
What are embargoes?
This is the complete ban on trade with a particular country. It is usually politically motivated.
What are Excessive administrative burdens? (Red tape)
It increases the cost of trading and hence discourages imports. It makes it difficult to trade with countries imposing red tape and is particularly harmful for developing countries that are unable to access these markets.
Argument for protectionism?
if there are new developing firms in a nation that haven’t had the time to grow and become big like its international rivals, gov might decide to tax imports or quota on imports coming in just to allow these domestic firms to grow in size to develop same size of eos to give them leverage to compete w big MNCs around the world. In the short term this gives them time to grow and produce greater levels of quantity then take away the protectionism when they are big enough. However bit weak as if you do protect the industries you are allowing them room for inefficiency
Protect against dumping. When a company decides to sell G and S below their costs of production. If there is an excess supply of them they sell those below production costs in other countries. These countries where they are being sold will be hit very hard as domestic industries can’t compete with these prices. Gov will introduce protectionism measures to go against this
Protect against domestic employment. If an economy feels mass unemployment because of how hard it is to compete with abroad firms they might bring in protectionism measures. However if industry already going into decline, you are just longing out the inevitable
Protect against unfair low cost labour abroad. Countries like China India.
To protect product standards. Environmental and safety measures. Protect against poor quality goods coming into your country
To raise gov revenue especially through a tariff. Can be used to fund other important public and merit goods
To improve CA deficit. If importing huge amounts then this will restrict the amount u spend on imports and maybe increase AD and increase econ growth. However you can expect very severe retaliation.
To avoid the risk of overspecialisation. By using protectionism you can focus on other industries where you can stop relying on just one industry for growth
If a country employed several protectionism measures, then a trade deficit will reduce. This is as they will be importing less due to tariffs and quotas on imports.
Infant industries might need protecting. These are industries which are relatively new and receive support. Protectionism is usually short term until the industry develops.
They can be used to correct market failure. It can deal with demerit goods and protect society from them
Govs might want to protect domestic jobs
Arguments against protectionism?
Reduced Consumer Choice: By limiting imports through protectionist measures, consumers may have access to fewer choices and may be forced to buy more expensive domestic goods, leading to higher prices and potentially lower quality products. This reduces consumer welfare.
Retaliation: When a country imposes protectionist measures, it often triggers retaliation from its trading partners. This can escalate into trade wars, where both sides impose tariffs and restrictions on each other’s goods, potentially harming their own economies in the process.
Higher Costs for Businesses: Domestic industries protected by tariffs or quotas may become complacent and less focused on efficiency. As a result, the costs of production may remain higher than they would be in a more competitive environment. This can hurt the competitiveness of domestic businesses in the global market.
Disadvantages of a tariff specifically but can be used for any protectionism essay
Market distortion. Free marketeers hate it. Price has increased due to tariff which means a loss of CS. More specifically a DWL of CS. Also loss of consumer choice from Q2 to Q4.
Also production inefficiencies as if allocation of resources have worsened. DWL in terms of world efficiency gains is same as allocative inefficiency. Higher price needed compared to world supplier which makes it more inefficient.
If you as a nation decide to impose a tariff on certain imports coming in like clothing wheat food tobacco etc u can expect retaliation coming from the nation on which you imposed this tariff.
Tariffs are regressive as consumers bear the burden. Often on items that the poor tend to buy more. Likely to worsen the redistribution of income
Eval:
Size of the tariff
Elasticity of demand and supply in the market. Intention of tariff is to squeeze imports coming into a country but if demand and supply are both very inelastic then the quantity of supply for domestic suppliers will increase but not by very much and same for the contraction of demand. So the fall of imports that come into an economy will be quite small.
