Protectionism (Int trade)

society as a whole

- dwl incurred by society as societal welfare would be higher without trade barriers

Govt

- govt receives tariff revenue the amt paid by consumers for imported quantity - achieve macro goal of favorable bop, economic growth and reduction in unemployment

Domestic producers

- incr in dd for domestically produced goods and services - higher price for goods and services - higher quantity of goods and services produced and sold - higher total revenue for domestic producers - higher producer surplus for domestic producers

Costs of protectionism for consumers

- lower consumption of goods and services - higher price of goods and services - lower consumer surplus

govt

- may lead to macro problem of inflation - may lead to trade disputes with other countries

domestic producers

- potential complacency - higher costs of imported fop

Benefits of protectionism for consumers

indirect impact on employment and national income

conclusion

read lect notes

The strategic industry or 'key' industry argument

A key industry is one that is vital to a country's political and economic interests or security and therefore requires protection by the government. Common examples include water, electricity, food, etc. Being dependent on other countries would be threatening for a country's survival as other countries could use these goods as a threat or bargain. eg. Sg's dependency on water from msia

To correct a BOT deficit

BOT deficits occur when country's total import expenditure exceeds exports earnings. This can be caused by importing too much and is undesirable as it leads to depletion of foreign currency reserves. BOP deficit caused by BOT deficit leads to leakages from the economy. Hence govt may reduce import expenditure to correct BOT deficit by restricting imports. Assuming there is an initial BOP deficit, when BOT deficit is reduced BOP deficit will decrease as well

To promote economic growth and reduce unemployment

Based on the notion that protectionism can result in higher employment in the country. By restricting the quantity of imports or imposing tax on cheaper imports, imports will become more expensive than domestic goods. This may induce domestic consumers to switch to domestic goods and generate demand for domestic FOP, including labour. This results in fall in unemployment. Use ADAS theory to explain. Decr in M and incr in C -> AD increases -> unplanned shortage of inventories in current period -> increase output in next period by hiring more FOP, including labour -> fall in unemployment

Evaluation

But inefficient allocation of resources occur when countries move towards producing goods that they do not have CA in, resulting in waste of resources on a global scale

To protect against low-wage foreign labour

Countries where people enjoy high wages have often felt threatened that their SOL would be undermined by import of cheaper goods from emerging countries where wages are low. Esp so bc workers in developing countries are paid lower wages. Consequently, foreign costs of production of imports are lower than domestic costs of production. Without protection, local industries cannot compete against lower costs of foreign imports and have to close down. This leads to higher unemployment and lower standard of living. To protect their jobs, trade unions and firms may have to press for higher tariffs and other means to keep out imported goods. This arg is used in the US to protect automobile, steel and textile industries

To defend against unfair trade practices (eg. dumping)

Dumping refers to the sale of goods abroad at a price that is below the marginal cost of production or below the price at which the product is sold for in the domestic market. This is often made possible by export subsidies given by the govt or through the process of price discrimination to drive out rival producers in the importing country so that the exporter can eventually monopolize the market. This leads to a reduction in domestic output and employment as domestic industries may not be able to compete against foreign exporters, leading to the collapse of the home industry and affecting bop, national income and employment. Use ADAS explanation where import expenditure incr n domestic consumption decr causing AD to decrease.

To enable a declining (sunset) industry to be phased out gradually

Industries may decline bc of decline in global demand for their product or loss of ca due to technological progress/incr in competition from other countries. Workers in these industries become redundant and need re-training in order to find jobs in other industries. Have to slow down decline of the industry or there will be a sudden, rapid and massive incr in unemployment in the economy. This can have negative psychological effects on the labor force, This point is esp impt in economies where industries in decline employ a significant fraction of labor force and these laborers might be occupationally immobile. Hence temporary protectionism such as import controls may help to slow down rate of these industries shutting down and allow more time for affected workers to go for skill training

The infant industry argument (potential comparative advantage)

Infant industries are newly established industries that may have potential for comparative advantage but are too new or undeveloped to realize this potential due to competition by more established foreign competitors. This argument is based on the notion that these firms require help in the initial stage because high initial costs are likely to be incurred in establishing the industry and these costs cannot be completely covered by the initial small output and therefore require protection from foreign competitors.

Foreign exchange controls

Involves government control over the purchase and sale of foreign currencies. International trade is carried out in term of foreign currencies. To import goods, payments must be made in foreign currency hence control over purchase of foreign currency effectively limits the total value and quantity of imports in the country.

Import licences

Licenses or permits granted by the government for goods to be imported. The purpose of this is to control the quality or type of goods imported. Eg. Msia issued import licenses to control the quantity of foreign cars that were imported into the country in the 1980s when they started their car manufacturing industries. This restriction shielded domestic car manufacturing sector and ensured to a large extent that there was a sufficiently high demand for the locally manufactured cars to sustain it.

Evaluation

One of the problems faced by govt is the difficulty of proving that foreign producers are being subsidized for their exports. Even after establishing a foothold in destination country, it is difficult to prove that the subsequent incr in price is due to exercising of monopoly power and not due to increase in cost of production.

Export subsidies

Payments made by the govt. to firms to encourage exports of goods and services to abroad. This makes country's exports relatively cheaper and more price competitive in foreign markets. Eg. China gives export subsidies to their domestic auto and auto parts manufacturers. This has a similar effect to reducing COP in domestic firms. Thus domestic firms now have cost advantage over foreign producers in export markets.

Evaluation

Protection from foreign competition may cause domestic firms to have less incentive to be more efficient in order to be internationally competitive. Esp when protective tariffs are used to support inefficient domestic industries or firms. (eg. sugar industry in US) In fact, total production and thus employment can increase if firms can sell more in global market. This can be done if firms innovate and become more efficient and workers are re-trained for jobs in industries in which countries have CA. Trade restrictions may reduce the export earnings of trading partners and hence reduce their ability to buy imports. The export industries of the country which adopts such measures may in turn be hit by a fall in export demand from its trading partners who exp lower increase in income.

Evaluation

Protection of infant industry should be at best a temporary measure. Once given, it is difficult to remove especially in the presence of strong worker's unions. Continual protection will lead to misallocation of resources as protection can remove the incentive to be efficient. When this happens, it results in such firms continuing to be inefficient for as long as they are protected. Misallocation of resources can also occur if govt incorrectly protects those industries without any potential ca. It is difficult to identify with certainty the industries that are presently unprofitable but which may acquire CA in the long run. Also hard to decide when to remove protection. A premature withdrawal of protection can cause early demise of these firms

The self-sufficiency argument

Similar to the arguments for economic diversification and strategic industry, a country may want to encourage the production of a range of goods to ensure that a country is relatively self-sufficient on basic necessities such as food. This aims to reduce a country's reliance and dependency on foreign trading partners for essential products and thus reduces a country's vulnerability should there be a disruption to the supply of these goods in times of political upheaval abroad.

Types of tariffs

Specific tariff: calculated based on a fixed amount of tax per unit of the imported product. Eg. a $10 tariff on each barrel of oil Ad valorem tariff: tax imposed as a percentage of the price of imports at the point of entry Eg. 35% of the value of each barrel of oil

Tarrifs / Custom duties

Taxes imposed on imports of goods by the government which results in higher prices of imported goods. This makes imported goods relatively more expensive compared to similar domestically produced goods and will encourage domestic producers to switch to consuming domestically produced goods instead of imported goods.

Protectionism

The setting up of trade barriers with the intention of protecting domestic firms from foreign competition

Evaluation

These are justified only if there are jobs available in the economy for those who are retrenched. Moreover, it should only be a temp measure and removed once suff time has lapsed for workers to acquire new skills for work in a diff sector

To diversify the economy

This arg is based on the possible undesirable consequences of specialization. Economies may be over-reliant on the production of some goods for exports or over-reliant on imports from other countries. Due to specialization based on a country's ca, the variety of goods and services produced by the economy and the types of jobs available will be limited. Hence, the economy becomes more vulnerable to changes in global demand for its products or an increase in the cost of imported raw materials. Such changes can come about bc of changes in tastes and tech etc. New inventions and changes in tech may eliminate a country's ca and lead to mass unemployment given the structural rigidity of the economy. Eg. synthetic rubber caused msia to hv siginficant fall in dd for natural rubber, the production of which msia had CA in the 1940s There are also social and psychological advantages in economic diversification bc it creates a variety of occupations to cater to diff talents and abilities of population and specialization limits the range of jobs available

Evaluation

This is a short term measure to deal with BOT deficit and it is better to examine the causes of deficit. If causes are internal economic problems such as inflation, govt overspending or slow rate of technical progress, BOT disequilibrium may not be corrected by trade restrictions. A more sustainable method would be to make locally produced goods more competitive in international markets to boost export earnings.

Evaluation

This is an outright rejection of theory of comparative advantage esp if cheaper foreign labour cost is a comparative advantage for exporting country. Protection tariff imposed on goods from low-wage countries will shield workers in protected high wage industries but consumers will be denied the opportunity to buy from cheaper source of supply. Hence benefits from trade will not be realized.

Evaluation

This leads to an overall contraction in world trade. Such measures eventually become ineffective with countries hitting out at each other and building up more and more tariff barriers. Every country will end up as losers as the total volume of world trade is reduced and the full benefits of international trade cannot materialize. Smaller economies highly dependent on international trade as an engine for economic growth tend to lose more as their growth can be hindered, compared to bigger economies that are less dependent on international trade

To retaliate against protectionism by another country

When a country is at the receiving end of protectionistic measures implemented on her by foreign countries to protect against foreign firms, protectionsim measures can be implemented on foreign countries as a form of retaliation

Import quotas

stated limits of the physical quantity or amount of specific goods that can be imported into a country. eg. Indonesian govt introduced an import quota on wheat flour imports in 2014 to protect their local wheat producers. Limits to imports must be set at a level lower than the imported quantity during free trade conditions As a result of the import quota the total supply of the good in the country would decrease resulting in a higher price, a lower quantity imported and a higher quantity produced domestically. Quotas provide a greater certainty of protection for local producers than tariffs because limits are placed on physical quantities. Compared to import quotas, tariffs are less effective if the demand for these imports are price inelastic.