Protectionism Flashcards
What do tariffs aim to do
Protect domestic industries from overseas competition by increasing the relative price of imports, thereby causing a fall in import demand
Benefits of tariffs
Generate tax revenues for the government who levy tariffs.
May also improve the trade balance.
Why does consumer surplus do following a tariff
Falls - as consumers are hit by higher prices
What happens to overall economic welfare as a result of import tariffs
Falls - there is a deadweight loss of economic welfare / loss of economic efficiency
Impact of an import tariff on domestic producers
Initially benefit - protected from lower prices imports and expect an increase in output at a higher price
Impact of an import tariff on foreign (overseas) producers
It is a barrier to trade and squeezes demand leading to lower revenues and profits
Impact of an import tariff on consumers
Consumers face higher prices - fall in real incomes. May affect lower income households more. Loss of consumer choice (lower utility)
Impact of an import tariff on the government
Tax revenues rise initially from having imported tariffs - rising GDP and profitability of suppliers
Evaluation point on the impact of an import tariff on domestic producers
Possible X-inefficiencies bc of reduction in intensity of market competition
Evaluation point on the impact of an import tariff on foreign (overseas) producers
Producers may be able to shift production / exports to countries or regions where import tariffs are lower
Evaluation point on the impact of an import tariff on consumers
Depends on PED of good affected
Evaluation point on the impact of an import tariff on the government
Adverse effects of possible retaliatory tariffs on other industries - slower economic growth from higher inflation
Examples of non-tariff barriers (NTBs)
- intellectual property laws e.g. patents
- domestic subsidies
- financial protectionism
- managed XRs
What are preferential procurement policies (NTBs)
Where governments favour local producers when finalising contracts for infrastructure projects or purchasing new defence equipment
What is a quota
A physical quantity (supply) limit on the volume of imports of a product
What is the effect of quota
To create excess demand for imports for a given level of demand (pushes up the market price)
Consequence of an import quota on government tax revenues
No direct effect - a quota is different from a tariff
Consequence of an import quota on consumer surplus
Fall - higher prices reduces consumer welfare
Consequence of an import quota on overall economic welfare
Falls - quota restricts free trade and leads to deadweight loss of economic welfare
Evaluation of the impact of an import quota on domestic producers
Domestic firms might become less productively efficiency
Evaluation of the impact of an import quota on consumers
Consumers who work for domestic firms may benefit from higher employment. Might stimulate increased investment in alternatives.
Evaluation of the impact of an import quota on the government
No immediate tax revenues from an import quota - a contrast with an import tariff
Recent example of import quotas in the news
EU sugar import quota scheme will come to an end (2017)
What is a subsidy
Any form of financial help given to domestic producers in order to lower their costs and help them compete in international markets
What is a subsidy a form of
Non-tariff barrier
What does a subsidy cause
A parallel downward shift in the supply curve
What do we assume about subsidies
That they are not large enough to change the world supply price but it does not give domestic firms a higher price (= world supply price + the subsidy)
What does a subsidy cause
A rightward shift on the supply curve
