15.3 - The Impact of Trade Protection If international trade is so beneficial, why do countries often try to block imports or subsidize domestic industries? We will learn the answer in this section

Effects of World Trade without the Presence of a Tariff Tariffs Effects of World Trade without the Presence of a Tariff In the graph, DS means domestic supply and DD means domestic demand. The price of goods at home is found at price P, while the world price is found at P*. At a lower price, domestic consumers will consume Qw worth of goods, but because the home country can only produce up to Qd, it must import Qw-Qd worth of goods.

Effects of World Trade with a Tariff in Place Tariffs cont’d Effects of World Trade with a Tariff in Place When a tariff is in place, the effect is to increase prices and limit the volume of imports. Here, price increases from the non-tariff P* to P'. Because price has increased, more domestic companies are willing to produce the good, so Qd moves right. This also shifts Qw left. The overall effect is a reduction in imports, increased domestic production and higher consumer prices. This is the extra revenue that the government makes by imposing a tariff.

Import Quotas If government cannot use tariffs (due to international trade agreements, e.g. NAFTA), gov’t may use other trade restrictions, known as non-tariff barriers (NTBs) to limit imports Import Quota is the most common NTB – it is a set limit on the quantity of a good that can be imported in a given year A gov’t can also threat trade restrictions on the exporting country so that they set a voluntary export restraint (VERs) These are import quotas voluntarily put in place by the exporting country Generally, importing countries find import quotas preferable to tariffs

Import Quotas cont’d A situation of unrestricted trade leads to an original price of P2 with consumption exceeding domestic production by Q4 – Q1. This is the initial amount of bicycles imported. By imposing a max level of imports of Q4 – Q2, this number of bicycles is added to the domestic supply, shifting the supply curve to the right Domestic Demand and the new supply curve intersect at new eq. price of P3 and quantity of Q3 Production is still split between domestic and foreign producers