protectionism 4.1

Question 1

What are the main reasons for protectionism?

Answer 1

1. Infant industry argument – protecting emerging industries until they have achieved economies of scale.
2. Sunset industry argument – use tariffs to slow the decline of old sectors and limit structural unemployment.
3. Diversify an economy that is thought to be too dependent on one product (e.g. primary product dependence).
4. Raise tax revenues - this is important for many developing countries with a limited domestic tax base.
5. Improve the trade balance & preserve jobs in key “strategic” industries such as telecoms and energy sectors.
6. Protection from dumping , like Chinese steel in EU

Question 2

what is dumping?

Answer 2

happens when firms sell exports at below costs or below normal prices in the home market

Question 3

examples of dumping

Answer 3

China’s steel industry is experiencing significant excess capacity and China has been accused of dumping its steel products on the EU, selling them for less than they are worth. That makes it harder for EU steel producers to compete.

Question 4

What are Anti-Dumping Tariffs?

Answer 4

• An ad valorem duty
• A specific duty
• A variable duty

Question 5

types of trade restrictions

Answer 5

tariffs
quotas
subsidies
migration controls
managed currencies

Question 6

impact of an import tariff

Answer 6

• expand domestic output
• contraction domestic demand
• fall in vol of imports
• increase gov fiscal
• increase domestic producer
• consumer surplus falls as prices are up

Question 7

impact of import quota

Answer 7

• increase domestic output
• contract domestic demand
• contracts import volumes
• no direct effect on tax revenue
• increased domestic producer revenue
• fall in cs as higher prices
• deadweight economic welfare loss

Question 8

types of non-tariff barrier

Answer 8

• intellectual property laws
• technical barriers to trade
• domestic subsidies
• financial protectionism - bank loans priorities
• managed exchange rate
• health and safety regulations

Question 9

drawbacks of protectionism

Answer 9

1. Resource misallocation – leading to a loss of economic efficiency.
2. Dangers of retaliation – and risks of a persistent trade war
3. Potential for more corruption - tariffs are higher in less democratic countries, revenues can be appropriated.
4. Higher prices for domestic consumers – this have a regressive impact on poorer people / communities.
5. Increased input costs for home producers – this damages competitiveness for businesses that require key imported component parts and raw materials that are subject to an import tariff or stringent quota.
6. Barriers to entry – protectionism reduces market contestability and thereby increases monopoly power.

Question 10

Subsidies to domestic products

Answer 10

• lower costs for domestic producers = lower prices
• can be used for r n d = more competitive and productively efficient
• e.g China subsidise car industry

Question 11

Impact on consumers

Answer 11

• higher prices
• less choice

Question 12

impact on producers

Answer 12

• domestic benefit as less competition
• if raw materials imported - higher costs
• foreign producers lose out heavily

Question 13

impact on workers

Answer 13

• jobs are lost as industries are outcompeted as a result of retaliation protectionism
• following steel tariffs by america in 2018, 16 jobs will be lost for every job gained in steel industry - economist
• but argentina have been successful at protecting jobs with tariffs

Question 14

impact on government

Answer 14

• tariff revenues + politically popular
• inefficient economy which stifles growth

Question 15

impact on living standards

Answer 15

• deadweight loss on tariff diagram
• trade wars due to retaliation