13) Protectionism

Question 1

what does international trade involve?

Answer 1

International trade involves the exchange of goods and services across international boundaries. When a country sells goods or services overseas it is exporting; when a country buys goods and services from overseas it imports.

Question 2

what does comparative advantage mean for countries?

Answer 2

The theory of comparative advantage has traditionally explained why countries benefit from international trade; every country would be better off if they specialise in the goods and services that they produce most efficiently and then trade with the rest of the world for everything else.

Question 3

what is protectionism?

Answer 3

represents any attempt to impose restrictions on trade in goods and services.

Question 4

what ways are there to impose restrictions of foreign imports? (7 things)

Answer 4

• Tariffs
  -Technical barriers to trade
  -Export subsidies
  -Domestic Subsidies
• Intellectual property laws
  -Import Licensing
  -Quotas

(TTEDII Q)

Question 5

what is a tariff?

Answer 5

a tax on imports, causing a contraction in domestic demand and an expansion in domestic supply

Question 6

what are technical barriers to trade?

Answer 6

including product labelling rules and stringent sanitary standards. These increase product compliance costs and impose monitoring costs on export agencies.

Question 7

what are export subsidies?

Answer 7

a payment to encourage domestic production by lowering their costs.

Question 8

what are domestic subsidies?

Answer 8

• government help (state aid) for domestic businesses facing financial problems e.g. subsidies for car manufacturers or loss-making airlines.

Question 9

What are intellectual property laws?

Answer 9

patents and copyright protection

Question 10

what is import licensing?

Answer 10

governments grants importers the license to import goods.

Question 11

what are quotas?

Answer 11

the quantitative (volume) limits on the level of imports allowed into a country in a year

Question 12

what are the Arguments in favour of protectionism and against unfettered free trade? (5 things)

Answer 12

• Fledging industry
• Externalities and Market Failure
• Protection of jobs
  -Protection of strategic industries
• Discourages Dumping

Question 13

what are the Arguments against protectionism/pro free trade ? (5 things)

Answer 13

• Market distortion
• Reduced market access for producers
• Regressive effect on the distribution of income
• Trade wars
• Second best approach

Question 14

what is fledging industry?

Answer 14

Certain industries possess possible comparative advantage but haven’t yet exploited economies of scale. Short-term protection allows the ‘infant industry’ to develop its comparative advantage

Question 15

what are the externalities and market failure for the arguments in favour of protectionism and against unfettered free trade

Answer 15

Protectionism can also be used to internalise the social costs of de-merit goods. Or to correct for environmental market failure in the supply of certain imports.

Question 16

What does protectionism and against unfettered free trade do for jobs and the balance of payments?

Answer 16

Protection of jobs and improvement in the balance of payments

Question 17

how does protectionism and against unfettered free trade protect strategic industries?

Answer 17

The government may also wish to protect employment in strategic industries, reducing long-term dependence on certain imports.

Question 18

how does protectionism and against unfettered free trade discourage dumping?

Answer 18

Goods are dumped when they are sold for export at less than their normal value- its a type of predatory pricing behaviour and a form of price discrimination.

Question 19

how does protectionism/pro free trade cause market distortion?

Answer 19

Protection can be ineffective and costly. It leads to higher prices for consumers and creates allocative inefficiency, productive inefficiency and significant deadweight loss of economic welfare.

Question 20

how does protectionism/pro free trade cause a reduced market access for producers?

Answer 20

Export subsidies depress world prices- damage output, investment and jobs in developing countries that rely on exports.

Question 21

how does protectionism/pro free trade cause a regressive effect on the distribution of income?

Answer 21

Higher prices that result from tariffs hit those on lower incomes hard because the tariffs often fall on those products that lower income families spend more on.

Question 22

how does protectionism/pro free trade cause trade wars?

Answer 22

There is the danger that a country imposing import controls will lead to “retaliatory action” by another, increasing costs of importing new technologies affecting LRAS.

Question 23

how is protectionism a ‘second best’ approach?

Answer 23

(easy way out), going against the principles of free trade and can be seen as examples of government failure arising from intervention in markets.

Question 24

how would you use DR PEPPER SUCKS?

Answer 24

Depends on D (maybe OK as short-term measure?); OC- opportunity cost; T (depends on type used); OR (depends what other countries are doing); EP (economic position), P (Politicians-Government Failure); E (PeD of protected products) S (e.g. size of tariff); UC (Unforeseen Circumstances)