Economics- Chapter 21- Protectionism

Against Protectionism

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Pro Protectionism

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Protect strategic industries

• arguments that military or defense needs should be produced domestically for security reasons

Overcome payments deficit

• balance of payments- measures flow of money in and out of a country • countries finding that they are spending excessively on imported goods, may enact protectionist policies to address this imbalance • short term solution- structural prelims causing imbalance are not addressed

Raise government revenue

• custom duties provide money for the government • down side: raising prices through duties lowers the amount imported in the country needed for growth and development

Counteract Relative Domestic Tax Differences

• domestic tax policies can reduce or enhance the competitiveness of a country's exports • 432

Prevent dumping of foreign goods onto the domestic market

• dumping- selling of goods to another country at a price below the original domestic production costs • dumping firms then raise prices when domestic competition has been destroyed • report to the WTO of dumping

Reduced export competitiveness

• firms that use imported resources pay higher costs and will have to sell them for more

Higher import costs

• higher prices may drive some imports out of the market

Protectionism as a corruption magnet

• industries that appeal for protection have a distinct economic interest in securing as much of it as they can • higher tariffs means more revenue for those producers which creates large incentive to probe lawmakers to enact such laws

Protect sunrise or infant industries

• infant industries- those that are newly developed and have not had an opportunity to develop the economies of scale and low costs that are achieved by selling to a large market • some industries are underdeveloped and are working on lowering prices so that they can be competitive and argue that they can be even more efficient if they are given the time • block out imports until company is ready

Protect domestic employment

• keep local jobs safe from foreign competition

Quotas

• limit on physical quantity of a good that can be imported •

Misallocation of resources

• making consumers pay higher prices on imported goods is misallocating income money • industries larger than otherwise would be draws in more workers than if it was jus free trade --> results in industries with comparative advantage to get less workers

Protect against unfairly low labor costs

• many imported goods are produced at wage rates far below those paid in their own domestic industries due to high amount of workforce

Diversify the production base of developing country

• most poor countries export limited range of basic goods • when market price drops --> loss of income for country • some poor countries would benefit from selectively protecting some domestic markets in an attempt to diversify economic base • ignores benefits gained by comparative advantage

Protectionism

• placement of legal restrictions on international trade, includes tariffs, quotes, subsidies and other bureaucratic barriers

Enforce product standards

• product standards protect customers and ensure reputation of a company • often, standards require extra costs of production

Domestic complacency causes higher prices and costs

• protected firms understand that their real profit comes from staying protected and put energy into persuading the public and politicians of their case • less initiative to actually improve their product

Tariffs

• tax charged on an imported good • raises line for supply of the world as prices go up • increases prices and demand for domestic goods • inefficiency- welfare loss- amount would already be produced at world price but now consumers must pay more for domestic producers to supply it; less demand due to tariff • causes price of good to rise- and if that good is used in the production of other goods, all of those goods will rise • domestic producers have strong incentive to keep tariff in place and government enjoys profit

Improve terms of trade

• terms of trade- ratio of export prices to import prices • try to reduce demand for imported good in order to lower price

Escalation to a trade war

• what might start out as a dispute over subsidies or unfair bureaucratic barriers can degrease quickly into a damaging trade conflict