ECON 4.2-4.3: Trade Protectionism and Evaluation

Question 1

What is trade protection?

Answer 1

Use of barriers to international trade to safeguard an economy from excessive foreign trade and competition from overseas firms.

Question 2

Argument for protectionism: protection of infant (sunrise) industries

Answer 2

Infant/sunrise industries: new/unestablished industries with the potential to achieve a comparative advantage but are too underdeveloped (w/o access to economies of scale) to compete with foreign firms
e.g. HK movie industry (quota imposition on foreign films)

• When to stop supporting the industry?
• Which industries get to be supported?
• Do industries really need governmental protection?

Question 3

Argument for protectionism: national security

Answer 3

Essential industries should remain “self-sufficient” (in case of major crises) / protectionism used to help protect these domestic industries
e.g. US govt w/ arms embargoes on export of weapons to Afghanistan

Question 4

Argument for protectionism: environmental standards

Answer 4

Some firms may relocate their production facilities to avoid stricter environmental protection controls and fines. To protect domestic firms and reduce pollution, govt imposes protectionism on these environmentally harmful goods.
e.g. Volkswagen diesel engine scandal

Question 5

Argument for protectionism: anti-dumping

Answer 5

Dumping is the sale of products by foreign firms at a price lower than the cost of production. Importers flood the domestic market with products deliberately priced lower than that of domestic firms.
e.g. sub-saharan African countries for textiles and fabrics (no thanks American cotton subsidies)

• Difficult to detect, must plead case with WTO

Question 6

Argument for protectionism: unfair competition

Answer 6

Lower corporate taxes have the same effect as subsidies - lowering costs of production for the firm - kind of like dumping

Question 7

Argument for protectionism: balance of payments correction

Answer 7

BoP is a financial record of a country’s transactions w/ rest of the world over a year (consists mainly of good and services trade).
Govt corrects BoP decifcit with protectionism (to reduce demand for imports)
- treating symptom of problem, not the problem itself

Question 8

Argument for protectionism: government revenue

Answer 8

Tariffs generate govt revenue (especially when used on price inelastic goods or luxury goods)
- may lead to retaliatory measures
- WTO sanctions

Question 9

Argument for protectionism: job protection

Answer 9

Purchase of imported goods creates a derived demand for labour in foreign economy. Lack of demand for domestic goods and services leads to structural unemployment in domestic industries.
Significant impacts on the standards of living of households in an economy.
- LR beneficial due to increased efficiency with international trade (allocates labour resources to their highest-valued activities, allows economies to specialize in production of goods in which they have a comparative advantage)
e.g. Jaguar sold to India’s Tata Motors and British Steel to China’s Jingye ensure protection of jobs in UK with ownership change

Question 10

Argument for protectionism: ELDCs diversification

Answer 10

Economically least developed country - low income country facing severe structural varriers to sustainable economic development (low levels of human capital, highly vulnerable to economic and environmental shocks)
Trade protection forces ELDCs to produce more than primary sector products (e.g. cocoa, coffee, sugar, rice)

Question 11

Argument for protectionism: health and safety

Answer 11

Different health and safety standards btwn different countries
e.g. use of embargoes to block the good from entering the domestic market

Question 12

Argument for free trade: misallocation of resources

Answer 12

Net loss in social/community surplus. Distorts market foces and comparative advantages. Creates inefficiencies in market to the detriment of the country’s well-being.

Question 13

Argument against protectionism: retaliation

Answer 13

Retaliation - country imposes trade barriers in response to trade restrictions being imposed on them from other countries. May escalate to trade wars. Multilateral retaliation (e.g. EU) is bad. Lead to greater consequences (bigger picture).

Question 14

Argument against protectionism: increased costs

Answer 14

For economies dependent on imports for factros of production (e.g. HK and Singapore), protectionism would increase the costs of production for domestic producers and reducer their profits. Bad for economy’s growth, development, and jobs.

Question 15

Argument against protectionism: higher prices

Answer 15

Cannot benefit from comparative advantage that comes with trade. Inefficient production from domestic producers who also require a higher price. Fewer consumers can maximize their benefits.

Question 16

Argument against protectionism: less choice

Answer 16

Less choice, domestic consumers can only have domestically produced goods to satisfy their needs and wants / fall in their overall standard of living

Question 17

Argument against protectionism: less incentive for domestic firms to become more efficient

Answer 17

Firms are unnaturally shielded from foreign competition - become inefficient and have lower producitivity due to rising costs of production associated with complacency.
X-inefficiency (difference btwn behaviour of rational firms in competitive markets and those w/o competition)

Question 18

Argument against protectionism: reduced export competitiveness

Answer 18

Export competitiveness - domestic firms’ ability to successfully export products to foreign markets owing to their ability to compete in overseas markets.
Protected domestic firms may try to export to foreign markets and find that their average costs are higher than more efficient and productive foreign firms.
- D for firm’s products from abroad > domestic D (gains in Dd as a result protectionism are not worth it compared to losses in export revenues)