Protectionism- Evaluation Flashcards
(12 cards)
Define protectionism.
Any government policy that restricts international trade to protect domestic industries — e.g. tariffs, quotas, export subsidies, administrative barriers, currency manipulation.
‘Market‑distortion’ argument against protectionism
Free‑market economists claim tariffs misallocate resources away from lowest‑cost world producers, reducing global & national efficiency.
Production inefficiency criticism
Domestic firms that need price support are typically higher‑cost; society forgoes cheaper world supply → lower total factor productivity.
Effect on product variety & choice
Imports fall, consumers face narrower range of goods (quality/brand diversity falls).
Potential retaliation risk
Trade partners may impose counter‑tariffs (tit‑for‑tat), escalating into trade wars, harming export sectors and global welfare.
Dynamic efficiency argument (long‑run)
Lack of foreign competition can reduce incentives for domestic firms to innovate & cut costs; X‑inefficiency rises.
Infant industry defence (evaluation)
May be valid if externalities & learning curves exist, but protection must be temporary & performance‑based; risk of capture by rent‑seeking lobbies.
Strategic trade / terms‑of‑trade argument (large country)
A large importer might lower Pw via a tariff, shifting some burden to exporters; net welfare gain possible if ToT improvement > B + D, but requires market power & no retaliation.
Conclusion for evaluation essays
Short‑run benefits (producer jobs, revenue, strategic motives) are usually outweighed by long‑run efficiency losses, higher consumer prices, and retaliation risks; careful cost‑benefit & sunset clauses essential.
Mnemonic for tariff evaluation
“C‑P‑G‑D‑R”: Consumers lose, Producers gain, Government revenue, Deadweight loss, Retaliation risk.
Why are tariffs often described as regressive taxes?
The price rise falls on consumers; essential goods (e.g. basic clothing, fruit & vegetables) form a larger share of low‑income budgets → poorer households pay a bigger proportion of income. ⇒ Worsens income inequality and equity.
How do demand & supply elasticities affect the real impact of a tariff?
If both domestic supply and import demand are inelastic, the “squeeze” on imports is small:
* Domestic producers can’t expand much → supply up only slightly.
* Consumers don’t cut purchases much → demand contracts only slightly.
Result: import volume barely falls, but consumer prices still rise → welfare loss with little protectionist “gain.”
