Unit 15.1 Flashcards
List the reasons why government restrict free trade
To Protect New Industries (Infant/Sunrise Industry Argument)
Governments shield budding industries from international competition with trade barriers, allowing them to develop and compete globally. Example: South Korea’s electric vehicle battery industry subsidies.
Economically Least Developed Country (ELDC) Diversification
Tariffs and subsidies help ELDCs transition from primary commodities to manufacturing sectors like renewable energy, promoting economic diversification.
Declining Industry (Sunset Industry Argument)
Protectionism supports industries that cannot compete internationally, addressing unemployment and regional deprivation caused by industrial decline. Example: U.S. steel industry protection from low-cost Asian and Eastern European competition.
Unemployment
Governments have historically used trade barriers to counteract recession-induced unemployment, such as the U.S. Smoot-Hawley Tariff Act during the Great Depression.
To Raise Revenue
Tariffs are a crucial revenue stream, especially for developing countries with limited taxation capabilities, although tariffs on necessities can adversely affect the poor.
To Deal with a Balance of Payments Current Account Deficit
Governments may reduce a current account deficit by restricting imports through trade barriers, but this might lead to retaliatory measures and long-term export decline.
Anti-dumping
Trade barriers can combat dumping, where products are sold below cost or domestic prices in foreign markets, as in the accusations against the Chinese solar panel industry in the EU.
Unfair Competition
Domestic markets are often protected against low-cost international producers perceived to have unfair advantages, such as the EU’s barriers on Asian textiles due to low wages and poor working conditions.
Health and Safety Standards
Barriers can enforce domestic health and safety standards, exemplified by EU restrictions on U.S. chlorine-washed chicken over animal welfare concerns.
Environmental Standards
Environmental protection motivates trade barriers, like the EU’s proposed actions against Brazil for Amazon deforestation.
Strategic Reasons
Protectionism ensures self-reliance in strategic industries, crucial for countries under geopolitical threats needing to secure food, energy, and material supplies.
Retaliation
Trade barriers can escalate into trade wars through retaliation, affecting unrelated industries, such as EU tariffs on Harley Davidson motorcycles in response to U.S. steel tariffs.
What are the costs of protectionism
Higher Import Prices for Consumers and Reduced Consumer Surplus: Protectionism leads to higher prices on imported goods, which directly impacts consumers by reducing their purchasing power and consumer surplus – the difference between what consumers are willing to pay and what they actually pay.
Welfare Loss of Consumers Who No Longer Buy an Imported Good: When prices rise, some consumers may stop purchasing certain imported goods altogether, leading to a loss in welfare for these individuals because they can no longer afford or choose not to buy these products.
Increased Import Costs for Businesses: Firms relying on imported raw materials or goods face higher costs due to tariffs, which can reduce their competitive edge and increase prices for their own consumers.
Welfare Loss of Inefficient Production: Protectionist measures may lead to domestic producers relying on subsidies or tariffs to survive, rather than improving efficiency or innovation, resulting in an overall loss of economic welfare due to less efficient production.
Reduced Consumer Choice: Trade barriers limit the variety of goods available to consumers, which can decrease satisfaction as consumers have fewer options to find the products that best meet their needs and preferences.
Costs to the Government of Managing Quotas and Other Trade Barriers: Implementing and monitoring trade restrictions incurs administrative costs for the government, which is a use of resources that could potentially be spent elsewhere for greater public benefit.
Retaliation Against Export Industries: Other countries may respond to trade barriers with their own, harming the exporting sectors of the economy and potentially leading to a trade war that amplifies the negative effects of protectionism.
What are the benefits of protectionism
Can Improve Protect Environmental and Health and Safety Standards: Protectionism can enforce higher environmental and health and safety standards by restricting imports from countries with lower regulations, promoting better practices globally.
Allows a Country to Develop an Industrial Base: By shielding nascent industries from international competition, protectionism enables countries to develop a robust industrial base, potentially leading to future competitiveness.
Can be Used to Raise Tariff Revenue: Tariffs can provide important revenue for governments, which can be particularly vital for developing countries with limited taxation systems.
Reduces Unfair Competition and Dumping: Trade barriers can prevent unfair competition from countries with lower production costs due to lower wages or regulations and protect against dumping, where goods are sold below cost to undermine local industries.
Reduces the Speed of Industrial Decline: Protectionist policies can slow the decline of aging industries, providing time to adapt and restructure, and potentially find new areas of competitiveness.
Protects Employment: By protecting industries from international competition, protectionism helps to secure jobs within those industries, which can be vital for maintaining social and economic stability.
