Trade, Tariffs and Protectionism Flashcards
what are tariffs?
a tax on imports – a fixed sum per unit;or an ad valorem or percentage tax (say, 15% of the value of each unit)
what are quotas ?
a limit on the number of units allowed to be imported
what are subsidies?
opposite of a tax: a fixed unit or percentage grant to domestic producers and/or exporters
what are non tariff barriers?
government restrictions of all types and imagination: insisting on certain environmental standards; health and safety standards; local custom; etc.
what are the economic arguements for tarifs?
infant industries argument
dynamic comparative advantage
what are the political arguements for tariffs?
protection guarentees jobs
nation security - protects vital industries such as defense, nuclear power, agriculture and energy
the environment - protection of native species, carbon tax
what is the economic effects of protectionist policies?
a protectionist policy that aims to maintain or increase employment in a less competitive sector will be detrimental to employment in the other comparatively advantageous and potentially growthful sectors. also the protection of basic capital goods production implies higher input prices for downstream manufacturing and service producers.
there might also be an tit for tat response by other countries which leads to tariffs being placed by foreign countries on our domestic goods, making them less attractive
what is the conclusion on which types of policies will be accepted or overturn when it comes to trade?
- Free trade policies that impart large losses on a small group of people but relatively small gains for each individual across society as a whole (and, in sum, large gains in general) may thus get overturned.
- Protectionist policies that impart large losses on society in general but only very small losses on each individual will,in contrast, face little opposition
what was the US smoot-hawley tariff bill of 1930?
it raised tariffs on average of 53%. other economies retaliated causing the world trade to plummet and the great depression to deepen
how can the consequences of a protectionist policy be shown on a ppf diagram?
assume a country exports good X and imports good Y from neighbouring economies. now assume that the country decides to protect the domestic industry of Y and resulting in a reduction of imports from other countries. this will shift along the PPF where there is now more Good Y being produced and less good X. this will lead to tit for tat responses from the neighbouring countries where they may put tariffs on Good X which will lead to less demand and therefore employment suffers in industry X so the country operates within the PPF at a lower production of Good X at the current level of Good Y. possible growth of the economy is stalled
how is the economic arguement for tariffs shown by the US?
the USA started economic growth under protectionist barriers in the 19th century in order to kickstart growth in the face of competition from the UK. subsequent US growth enabled tax revenues to be based on incomes and corporation and consumption taxes. tariffs were then progressively cut.
how can tariff protection be represented graphically in a supply and demand diagram?
conside the uk demand and supply for a homogenous product which can either be supplied domestically or abroad. the foreign supply is a horizontal line below the domestic equilibrium point. originally consumers will purchase domestically until it reachs the foreign horizontal supply curve then rest of the demand will be covered by imports. once a tariff is placed the world supply curve will be shifted upwards. this is due to a advalorem tax pushing up the world supply upwards so it joins world demand at a higher price. at the new world supply, the UK producers will supply more and at a higher price. the government will also receive tax revenue however there will be a deadweight loss
what occurs for a small country where domestic supply and demand are not significant enough to have any effect on world markets?
thw world supply curve to this country is going to be perfectly elastic ( there are unlimited supply at the going price)
the imposition of a domestic tariff would shift up the WS curve by the full amount of the tax
there would be no fall in the world market prices due to a reduction in this small countries demand
in a large country, imposing a tariff on a given import will:
raise the price of the good in the importing country
lower the demand for such imports and thus reduce the price of the good for the exporting producer
what is a production distortion loss?
a loss due to a change in supplies from efficient foreign producer to a less efficient domestic producer
