1- Protectionism Flashcards
Protectionism definition
When the government enacts policies to restrict the free entry of imports into their country.
Reasons for protectionism
Retaliation
Employment (domestically increases)
To allow infant industries to grow (build economies of scale)- ROOM FOR INEFFICIENCY
Current Account- reduce deficit
Avoid overspecialisation
Raise government revenue
Avoid Dumping- ITS HARD TO PROVE AND MAY CAUSE RETALIATION
Drawbacks of tariffs
- Consumer surplus falls- less choice
- Retaliation
- Fall in efficiency
- Distortion of comparative advantage
- Tariffs are regressive
- If tariffs are on goods with inelastic supply and demand they will be ineffective
Dumping definition
The sale of a good below costs of production
Quota definition
Limits placed on the level of imports allowed into a country.
Protectionism effect on consumers
- Higher prices
- Less choice
- Lower consumer surplus
Protectionism effect on producers
- Less competition for domestic firms- they can sell more goods at higher prices- increase exports
- They may suffer from higher costs if others retaliate
- Foreign producers are limited to where they can sell- efficient foreign producers lose out and inefficient domestic producers stay in business
Protectionism effect on workers
- Increase jobs domestically
- Decrease jobs in foreign countries
- BUT: evidence shows not much change in employment figures
- It’s argued the shut down of inefficient firms is better in the long run and jobs will be reallocated
Protectionism effect on governments
- Can gain tariff revenue
- Politically unpopular
- Long run- inefficiency could stifle growth
- Retaliation
Protectionism effect on living standards
- DWLs
- Retaliation- trade wars
Protectionism effect on equity
- Tariffs are regressive
Other evaluation
Threat of WTO
