Protectionism - booklet 2

Absolute advantage

When a country is able to produce a good using fewer resources

Comparative advantage

When a country is able to produce a good at a lower relative opportunity cost

Evaluations of comparative advantage

It assumes there’s only two traded goods and countries, assumes all goods are homogenous, assumes there are no EoS, ignores transport costs, ignores external costs from trade, and assumes a constant opportunity cost.

Example of absolute advantage

Zambia in copper production due to its huge ore reserves leading to obvious gains from trade and specialisation if Zambia exports copper

Absolute disadvantage

A country that is inefficient at producing anything compared to other countries

Limitations of comparative advantage

It assumes perfect mobility of FoPs, the PPF model is overcomplicated (lines should be curved but are straight), doesn’t consider transport costs e.g for landlocked countries, doesn’t consider external trade costs (pollution, tariffs, subsidies).

Types of free trade restriction

Tariffs, quotas, subsidies to domestic producers, non-tariff barriers such as health & safety regulations

Protectionism

The use of economic policies to regulate trade between countries to reduce imports. It also can help protect jobs.

Dumping

The sale of goods at less than cost price by foreign producers in the domestic market. E.g China exporting steel to the US which can be harmful to local industries as it undercuts their prices.

Why restrict free trade?

Prevent trade wars (Trump & China 2018), prevent dumping, reduce local unemployment, increase the fiscal account, reduce dependency, increase national security, protect jobs, reduce monopoly power of global firms, protect industry standards (US chlorinated chicken).

Advantages of tariffs

Protect domestic industries, increase gov revenue, encourage domestic protection, improve the balance of payments

Disadvantages of tariffs

Higher prices for consumers, trade wars, job losses in import dependant industries (technology, pharmaceuticals and steel), harmful to developing countries, reduced efficiency, inflation.

Benefits to removing trade barriers

Increase international trade, encourage positive relations with other countries, increased competition

Impacts of protectionism on consumers

Higher prices and reduced choice

Impacts of protectionism on producers

Protection of domestic industries, higher costs of input goods, and less incentive to innovate

Impacts of protectionism on the government

Increased revenue, potential trade wars, and increased control of key secotrs to ensure national security

Impacts of protectionism on living standards

Decline in living standards from higher prices and slowed economic growth

Impacts of protectionism on equality

Could help protect jobs, could harm lower income individuals

What are the main aims of the WTO

To negotiate trade agreements, and settle disputes between countries

Benefits of the WTO

Promotes free trade, resolves disputes, promotes economic growth, helps establish global trade standards, encourages development, reduces protectionism

Drawbacks of the WTO

Favours developed countries, increases competition for developing countries, slow decision making, prioritises trade over environment and labour standards, harmful to domestic industries