3. Types of Protectionism PDF

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Types of protectionist measures include tariffs, subsidies, quotas, administrative barriers, and nationalistic campaigns. Free Trade  When goods and services are exchanged freely across countries.

 Without international trade, domestic farmers produce Qe tons of wheat at a price of Pe per ton.  If foreign trade takes place, consumers can import as much wheat as they like at the world price, so the supply curve is perfectly elastic. The world price is lower than the domestic price or there would be no point trading.  With free trade, the quantity supplied by domestic farmers is Q1, but the quantity demanded is Q2, so the excess demand is satisfied by imported wheat. Foreign producers supply Q1Q2 tons of wheat at Pw. Tariffs  A tax charged on imported goods.

 World supply curve shifts up by the amount of the tariff from Sworld to Sworld + tariff, so world price increases from Pw to Pw + T. Total quantity demanded decreases due to the price increase from Q2 to Q4.  Quantity supplied by domestic producers increases to Q3, and their revenue increases from g to g+a+b+c+h. Foreign producers supply Q3Q4 and revenue decreases from h+i+j+k to i+j because they receive the original world price without tariff. Government tariff revenue is d+e.  The most common anti-dumping measure, as a tariff on an imported good raises prices to eliminate the cost advantage of exporters.  Q2Q4 tons of wheat are now not demanded, so consumers keep the amount k but there is a loss in consumer surplus known as a deadweight loss of size f.  Q1Q3 tons are now produced by domestic producers who need revenue h+c instead of foreign producers who only need h. Therefore, c represents allocative inefficiency of the world’s resources, another deadweight loss. Subsidies  The government can give a subsidy to domestic producers to make them more competitive.

 Domestic supply curve shifts down by the amount of the subsidy from Sdomestic to Sdomestic + subsidy. Market price remains at Pw, so quantity demanded remains at Q2.  Quantity supplied by domestic producers increases to Q3, so their revenue increases from a to a+b+e+f+g. Foreign producers supply Q2Q3, so their revenue falls from b+c+d to c+d. Government pays e+f+g.

 Q1Q3 tons are now produced by domestic producers who need revenue b+g instead of foreign producers who only need b. Therefore, g represents allocative inefficiency of the world’s resources, another deadweight loss.  There is no loss of consumer surplus, but consumers are indirectly affected as government uses tax revenues to fund the subsidies, possibly meaning higher taxes or reduced government spending on other things. Quotas  A physical limit on the number or value of goods that can be imported into a country.

 The government imposes a quota of Q1Q3. Domestic producers supply Q1 at Pw and foreign producers produce the quota of Q1Q3. Once this has happened, there is excess demand Q2Q3 at the original market price, so price begins to rise.  Foreign producers are not allowed to supply more wheat and domestic producers begin to enter the market, shifting the domestic supply curve to the right from Sdomestic to Sdomestic + quota. The price settles at Pquota and total quantity demanded falls to Q4.  Domestic producers now supply Q1 and Q3Q4 tons of wheat and their revenue increases from a to a+c+d+f+i+j. Foreign producers also receive Pquota so their revenue changes from b+c+d+e to b+g+h, which is usually a fall in income but not necessarily is.  Q2Q4 tons of wheat are now not demanded, so consumers keep the amount e but there is a loss in consumer surplus known as a deadweight loss of size k.

 Q3Q4 tons are now produced by domestic producers who need revenue c+d+j instead of foreign producers who only need c+d. Therefore, c represents allocative inefficiency of the world’s resources, another deadweight loss. Administrative Barriers  “Red tape” processes such as lengthy paperwork or legal procedures before exporters can sell goods into a country slow down and deters imports or increases costs, hence protecting against imports.  Various restrictions may be placed on goods to meet health, safety, and environmental standards.  Embargoes are extreme quotas that complete ban imports from offending countries as a political punishment. More commonly, countries place a set of economic sanctions to achieve desired political objectives. Nationalistic Campaigns  Governments sometimes run marketing campaigns to encourage the purchase of domestic instead of foreign goods to generate demand for domestic goods and preserve domestic jobs.  This can be described as “moral suasion”, where the government links consumption of imported goods to the creation of unemployment....