protectionism chapter 26

Question 1

protectionism (in international trade)

Answer 1

protecting domestic producers from foreign competition. it involves the restriction of free trade

Question 2

tools of protection and impact

Answer 2

the tools of protection often seek to increase the price competitiveness of domestic industries. they are-
tariffs
import quotas
export subsidies
embargoes
excessive administrative burdens (‘red tape’)

Question 3

tariffs (custom duties)

Answer 3

a tax imposed on imports. sometimes tariffs may be imposed on exports. tax can be specific (a fixed sum per unit) or ad valorem (a percentage of the price). a tariff imposes an extra cost on the supplier which usually pushes up the price

Question 4

reasons why governments impose imports tariffs

Answer 4

one is to discourage consumption of exports; another is to raise tax revenue

Question 5

when can a tariff be more effective in raising revenue

Answer 5

a tariff will be more effective in raising revenue if demand for imports is price inelastic whereas it will be more effective in protecting the domestic industry if demand for imports is price elastic

Question 6

why can the imposition of tariff may not make domestic products more price competitive

Answer 6

this would be the case if the price of the import plus the tariff is still below the domestic price or if firms selling the imports absorb the tariff and do not raise their prices

Question 7

why would tariffs be imposed on exports

Answer 7

a government may put a tax on exports to raise revenue. if demand for the export is price inelastic, the imposition of an export tariff may not have much impact on demand. governments may impose a tariff on a product to ensure an adequate supply of the product on the home market, it can reduce the risk of absolute poverty increasing and malnutrition occuring.

Question 8

how can export tariffs act as a form of protectionism

Answer 8

this is because if they are placed on raw materials, they can protect the domestic industries that use those raw materials

Question 9

absolute poverty

Answer 9

a condition where people’s income is too low to enable them to meet their basic needs

Question 10

quota

Answer 10

a limit on imports. the limits are usually imposed on the quantity of imports

Question 11

what happens when the supply of imports is restricted

Answer 11

restricting the supply of imports is likely to drive up their price. so, as with tariffs, quotas are likely to disadvantage consumers as they result in them paying higher prices and consuming fewer products

Question 12

why do not quotas usually do not raise revenue for the government

Answer 12

it is the sellers of the imports that will receive the extra amount per unit paid by consumers. however, in some cases licenses are sold to foreign firms to sell some allocation of the quota

Question 13

why are quotas on exports imposed

Answer 13

as with export tariffs, the motive may to ensure an adequate supply on the home market or as a form of protectionism

Question 14

who receive subsidies

Answer 14

subsidies may be given to both exporters and to those domestic firms that compete with imports. in both firms will, in effect, experience a fall in costs. this will encourage them to increase their output and lower their price. this may enable them to capture more of the markets at home and abroade

Question 15

who lose because of export subsidies

Answer 15

the losers will be foreign firms and domestic taxpayers. domestic producers will gain. Consumers will also benefit in the short run. However, in the long run, they may lose if more efficient foreign firms are driven out of business and subsidized domestic firms raise their prices.

Question 16

embargoes

Answer 16

a complete ban either on the imports of a particular product or on trade with a particular country

Question 17

why do governments want to ban the import of product

Answer 17

a government may want to ban the import of a product that it regards as harmful

Question 18

what can a ban on a particular country cause

Answer 18

a ban on trade with a particular country may arise from political disputes

Question 19

voluntary export restraints (voluntary export restrictions)

Answer 19

a limit placed on imports reached with the agreement of the supplying country.

Question 20

why might an exporting country sign a voluntary export restraint

Answer 20

The exporting country may be pressured into signing such an agreement or it may agree in return for the importing country also agreeing to limit the exports it sells of another product.

Question 21

excessive administrative burdens (red tape)

Answer 21

a government may seek to discourage imports by requiring importers to fill out lengthy forms that are time consuming to complete. it may also set artificially high product standards to restrict foreign competition. such measures restrict consumer choice

Question 22

exchange control

Answer 22

restrictions on the purchases of foreign currency. instead of limiting imports directly, a government may place limits on the amount of foreign exchange that can be purchased in order to buy imports, travel abroad or invest abroad

Question 23

infant industries (sunrise industries)

Answer 23

new industries that have a low output and a high average cost

Question 24

dumping

Answer 24

selling products in a foreign market at below their cost of production

Question 25

monopoly

Answer 25

where one firm dominates the market due to having a large market share; a pure monopoly is a single seller with 100% market share

Question 26

why can firms in a new industry find it difficult to survive when faced with competition from more established larger foreign firms

Answer 26

the foreign firms are taking advantage of economies of scale and/or benefiting from their names being well known

Question 27

why should a new infant industry be protected

Answer 27

protected to give the industry time to grow and so benefit from economies of scale and to gain an international reputation. If the infant industry has the potential to develop into an efficient industry in line with comparative advantage, then using trade restrictions may be justified.

Question 28

disadvantage of protecting a new infant industries

Answer 28

it is difficult to identify which new industries will develop and gain a comparative advantage. It is, for example, very difficult to estimate the long-run average cost curves of firms in the industry.

Question 29

risk of protecting new infant industries

Answer 29

an infant industry may become dependent on protection. Knowing that rival foreign products are being made artificially expensive, it may not feel any pressure to lower its costs.

Question 30

impact of declining (sunset) industries

Answer 30

if declining industries that have lost their comparative advantage go out of business quickly, there may be a sudden and large rise in unemployment. As the industry reduces its output, some workers may retire and some leave for jobs in other industries.

Question 31

how can protection help declining industries

Answer 31

If the industry is given protection and the protection is only gradually removed, unemployment might be avoided.

Question 32

risk of declining industries

Answer 32

there is a risk that the industry may resist reductions in the protection it receives. This can lead to considerable inefficiency.

Question 33

strategic industries

Answer 33

an industry that a government considers to be very important for the country’s economy or safety. they produce products such as weapon, fuel and food

Question 34

why do governments want to protect strategic industries

Answer 34

Governments may not want to be dependent on foreign supplies of these products.

Question 35

why there may be economic justification for imposing trade restrictions on dumping

Answer 35

this practice may be regarded as unfair competition

Question 36

short term effect of dumping

Answer 36

home consumers will benefit from dumping as they will enjoy lower prices.

Question 37

long term effects of dumping

Answer 37

if foreign firms drive out domestic firms, they may gain a monopoly and then raise their prices.

Question 38

why may foreign firms engage in dumping

Answer 38

may engage in dumping with the specific objective of gaining control of a market in another country by destroying existing competition and preventing new domestic firms from becoming established.

Question 39

how can foreign firms cover losses

Answer 39

they may be able to engage in dumping by covering losses with previous profits, by charging high prices in their home market or because they receive subsidies from their governments

Question 40

difficulty of dumping

Answer 40

it can be difficult to determine if dumping is taking place or whether the foreign firms have gained a comparative advantage

Question 41

how can trade restrictions improve a country’s terms of trade and allow it to purchase more imports for the same quantity of exports

Answer 41

If a country purchases a large proportion of another country or countries’ exports of a product, it may be able to force down the product’s price. By imposing trade restrictions, the country can lower demand for the product and, as its demand is significant, this may lead to a lower price.

Question 42

how can restrictions on the supply of exports drive up their prices and so increase the purchasing power of goods

Answer 42

if a country accounts for a significant proportion of the world’s supply of a product, quotas on its exports may improve its terms of trade.

Question 43

causes of distortion of trade

Answer 43

happens when a country lower demands for a product or restricting supply for a product

Question 44

impact of trade

Answer 44

it is likely to reduce global output and may also result in retaliation

Question 45

current account (within the balance of payments)

Answer 45

a record of the trade in goods, trade in services, primary income and secondary income. a government impose trade restrictions to improve its current account position

Question 46

what happens when trade restrictions are imposed to improve current account

Answer 46

this may lead to retaliation. If foreign governments retaliate by imposing their own trade restrictions then, while the country’s imports may fall, so might its exports. International trade would decline and again global output would fall. In addition, if the country’s products are not internationally competitive because of strategic problems, trade restrictions would only provide a short-term boost to the current account.

Question 47

retaliation

Answer 47

Action taken by a country whose exports are adversely affected by the raising of tariff or other trade-restricting measures by another country

Question 48

arguments on why should trade restrictions be imposed on products from countries where wages are very low

Answer 48

in order to compete, wages and so living standards in the country would have to fall. there may be moral arguments for imposing trade restrictions on products produced using slave or child labour. trade restrictions may drive down wages even further in low income countries

Question 49

why so low wages do not always mean that a country will be able to produce products more cheap

Answer 49

labour productivity may be low and so labour costs may be actually relatively high .

Question 50

what can be low wages indicate

Answer 50

if low wages are actually linked to low costs, it may indicate that the countries have a comparative advantage

Question 51

reasons why a government may impose trade sanctions

Answer 51

tariffs may be used to raise revenue, this will be successful if demand for imports is inelastic. a government may impose trade restrictions to try to persuade another government to reduce its trade protection, there is a risk that a trade war will develop. a government may be concerned that certain do not meet health and safety standards, governments may have different standards. in addition, a government may seek to protect a range of industries to avoid the risks attached to overspecialization

Question 52

arguments against protectionism

Answer 52

prevent countries from specializing in the products in which they have a comparative advantage, this can lower global output and living standards
reduce international competition and so increase prices and lower quality of products
reduce the choice of products available to consumers
lower the size of firms’ markets and so reduce their ability to take advantage of economies of scale
reduce firms’ choice of raw materials and capital goods which may increase costs of production
results in a trade war, with tariffs pushing up prices