1. Protectionism aka Trade Barriers 3.1b
Every year there is some version of this on the test

2. FREE TRADE or PROTECTIONISM?
Free trade = no trade barriers
Trade is allowed to be conducted w/o any restrictions
Absence of artificial barriers (government imposed)
Protectionism = imposing trade barriers to protect the income of domestic producers.

3. Overview of Types of Protectionism
Direct forms of Protectionism
Embargo
Tariffs
Quota
subsidies
Alternative forms of Protectionism
VER
Exchange Controls
Import Licenses
Administrative Barriers
Health and safety
environmental

4. Embargo: Total ban or lack of trade
May be self-imposed by a domestic government
Self-imposed embargos on illegal drugs, endangered animals etc
Imposed from outside for political or military reasons.
Most effective when country can’t produce embargoed goods by themselves, or at a very high cost.
S domestic
Pt. 1 is equilibrium
for domestically
produced goods. 1
Price P D Q1
Quantity

5. Complete Free Trade
Due to comparative advantage, imports flow in at P2, as foreign merchants can undercut domestic production.
S domestic
Pt. 2 trade benefits
consumers because
prices are lower (from
p1 to p2) and they
have more goods
available, Q0 to Qw.
Domestic producers
lose because they sell
less, A to Q0 and at
a lower price, p2 instead
Of p1. 1
Price
P1,domestic 2
P2, world
S world D A W Q1
Quantity

6. Tariff: tax on imports ad valorem
A tax on a good whose amount depends on the value of the good or service, eg. 15% sales tax
S domestic 1
Price P1 5 P3 4 S
Tariff 3 2
S world P2 D A B C W
Quantity

7. Tariff - Domestic Impact
Producers benefit- A to B and those producing at 0 to A get higher price (0P3 rather than 0P2)
Consumers lose- higher prices at P3 and fewer goods at C rather than W.
Government gains
Gov. Revenue
S domestic 1
Price P1 44 5 P3 4 S
Tariff 3 2
S world P2 D A B C W
Quantity

8. Quotas-
A physical limit on the amount of goods which may be imported in a set period of time
S domestic
Quota
Equilibrium with quota
Price P1 P3
S world P2 D
Equilibrium with free
trade. At P2 A B C Qw
Quantity

9. Quota- Domestic Impact
Producer Benefits – Better than free trade but not as good as an embargo
Consumer Result – Increased P but decrease Q compared to free trade but lower P and higher Q than without free trade.
S domestic
Quota
Equilibrium with quota at P2 the free trade allows certain goods in up to the max of B and then no more M allowed so supply =Sd
Price P1 P3
S world P2 D
Equilibrium with free
trade. At P2 A B Q0 C Qw
Quantity

10. Subsidies –
applied to domestic goods to make them cheaper and more competitive with imports.
S domestic
S domestic w/subsidy
Price P P2
S world P1 2 D C Qw
Quantity

11. Subsidies – Domestic Impact
Domestic producers – this decreases costs for domestic producers so they can compete with imports.
Consumers – pay same p as with free trade and receive same Q
S domestic
S domestic w/subsidy
0-Q0 produced
domestically
Q0-QW imported
Price P P2
S world P1 2 D Q0 C Qw
Quantity

12. Alternative Forms of Protection
Voluntary Export Restraints (VER)
Exporting country agrees to a voluntary quota of exports into a second country
Exchange Controls
Government limits amount of foreign currency available to importers, or citizens traveling abroad, or companies investing abroad
Import Licensing
Form of rationing where the importer must obtain a license, or permission to import
Administrative Barriers
Safety, health or environmental requirements
Other forms of “red-tape” obstacles

13. Arguments for Protectionism
Military self-sufficient
Infant Industry
Protect developing industry in LDCs
Declining Industries
Allow firms a period of protection
Protecting Employment
Anti-Dumping
Dumping: product exported at a price below production costs

14. Arguments Against Protectionism
The reading does an excellent job of presenting this material, what do you think?
HIGHER PRICES
Poor Resource Allocation