Protection And Trade Liberalisation (Assessment 8) Flashcards
Define tariffs
Tariffs are simply a tax placed on imports AND ARE DESIGNED TO increase the price of the foreign good or service so that the competing domestic good receives a price benefit.
Define protection
Protection refers to the actions taken by the government designed to give domestic producers an artificial advantage over foreign producers.
Define subsidies
Grants or payments made by the government to domestic producers so that the domestic producer can sell his product at a lower price to compete against the imports.
Define quotas
Quotas are the direct restriction on the quantity of an imported good
AND ARE DESIGNED SO producers know with a degree of certainty as to the exact quantity of imports they will be competing against.
How is the “infant industries argument” an argument FOR protection?
It helps infant businesses, or businesses in their earlier years, by helping them have a fairer chance when competing against foreign businesses. This leads to an increase in international competitiveness.
However, these businesses may grow complacent overtime, as they have no competition, while they’re growing and, thus, have no incentive to INNOVATE or INCREASE EFFICIENCY.
What are the benefits of trade liberalization?
- Specialization
- Decrease in prices
- Resources allocated to more efficient industries
How is “specialization” a benefit of trade liberalization?
This argument for free trade are based on the theory of comparative advantage and the theory of competitive markets. By exporting goods and services that can be produced more efficiently and importing goods and services that other nations produce at a lower opportunity cost, a country can increase both its production and consumption.
Industries benefit from exporting in terms of greater output and employment and consumers benefit from imports in terms of a greater variety of goods at lower prices.
How is “a decrease in prices” a benefit of trade liberalization?
Lowering trade barriers reduces the cost for all industries in the economy making them more efficient and competitive.
How is “efficient resource allocation” a benefit of trade liberalization?
The advantage of removing or reducing protection levels is that is that the industries concerned must increase their efficiency in order to compete.
In this way, resources would be released to more efficient industries and living standards will improve.
Define trade liberalization
The removal or reduction of any restrictions which limit trade in goods and services.
What are the arguments FOR protection? (7)
1) Infant industry argument
2) Diversification argument
3) Anti-dumping argument
4) National defense argument
5) Increased employment argument
6) Cheap foreign labour argument
7) Favorable balance of trade argument
What is the World Trade Organization?
The WTO is the international organs action that promotes the liberalization of world trade by encouraging the reduction of protection.
What are the WTO’s main activities?
Negotiating the reduction or elimination of obstacles to trade (e.g. tariffs) and agreeing on rules governing the conduct of international trade.
Trade is vital to the world economy and the WTO ensures that it flows freely.
Promotes multiculturalism
Why is “anti-dumping” a benefit of protection?
Dumping is when foreign try to get rid of their surplus in the domestic market at abnormally low prices. This means foreign producers are engaging in unfair competition to drive out domestic producers. Protection means that even if they sell at abnormally low prices, prices still high as (e.g. If tariff is placed).
Problem it’s uncertain to decide whether dumping is occurring or if the foreign firm has comparative advantage over domestic producers
How is “the national defense argument” an argument for protection
(Like diversification)
Import barriers are put in place on industries that are vital to the economy in case of a war time emergency.
PROBLEM
Don’t know which ones to protect.
Protection discourages international corporation.
Solution, import and stockpile the goods and services thought to be needed in case a war arises.
