3.1 D Types of PROTECTIONISM Chapter 22 Pages

Learning Objectives: Explain, using a diagram, the effects of 1. 1.imposing a tariff on imported goods 2. 2.setting a quota on foreign producers 3. 3.subsidizing domestic producers on different stakeholders – including domestic producers, foreign producers, consumers and the government. 4. Describe administrative barriers that may be used as a means of protection. 5. Evaluate the effect of different types of trade protection.

Free Trade Free Trade means… …that there are no barriers placed by governments to trade between participating nations. Protectionism is… … any law (or policy) used to restrict the flow of imports from foreign countries.

Tariffs An import tariff (customs duty) is a tax charged on imported goods and services. As an excise tax, its effect is to raise the price of the import, thus reducing quantity demanded (encouraging domestic firms to increase their sales instead).

World price Price without tariff How to show The Effects of a Tariff? Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Q1SQ1S Q1DQ1D Imports without tariff

The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff

The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff C G Producer surplus With tariff A Consumer surplus with tariff B Price without tariff Price with tariff

The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff E Tariff revenue Price with tariff Price without tariff

The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A B CE G DF Deadweight loss

Quotas A quota is a quantitative limit on imports set by the importing country. This could be an actual quantity or perhaps a percentage of the market – eg Japanese imports could be limited to 10% of the US car market.

Price with quota World price Price without quota The Effects of an Import Quota... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Q1SQ1S Q2SQ2S Q2DQ2D Imports without quota Imports with quota Domestic supply + Import Supply Quota Equilibrium with quota Equilibrium without trade Q1DQ1D

The Effects of an Import Quota... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without quota Price with quota Imports without quota Imports with quota Domestic supply + Import Supply Quota A B CE'E' E '' F G D

Both tariffs and import quotas...  raise domestic prices.  reduce the welfare of domestic consumers.  increase the welfare of domestic producers.  cause deadweight losses.

Importer’s Windfall or same Government Revenue? If government sells import licenses for full value, their revenue equals that of equivalent tariff and the results of tariffs and quotas are identical. Otherwise, the importers can make a windfall due to the higher price gained at the expense of lower quantity.

Subsidies to Domestic Producers By giving a subsidy to domestic producers, the government reduces the price of domestic goods relative to foreign goods, and hence brings about a reduction in the quantity of imports (and possibly an increase in the quantity of exports) By giving a subsidy to domestic producers, the government reduces the price of domestic goods relative to foreign goods, and hence brings about a reduction in the quantity of imports (and possibly an increase in the quantity of exports) Task 1: Workpoint 22.4 [See page 274 ] Task 1: Workpoint 22.4 [See page 274 ] Task 2: illustrate and explain when a subsidy actually rreverses trade patterns: becomes exports (when beforehand they imported it)

Administrative Obstacles A subtle way of applying protectionism is by using regulations governing trade to target unwanted imports. Many examples have been cited in the past: Strict labeling requirements Strict labeling requirements Limited port access Limited port access Quarantine of good for lengthy periods Quarantine of good for lengthy periods Task 2: add to this note using info from page 278

Exchange Rate Controls Exchange control is management of a currency that maintains a specific (usually low) value in terms of other (foreign) currency. Such “manipulation” means that foreign importers’ currency is more expensive, hence their products become more expensive. (This also promotes exports of the country that keeps its currency low).