types of trade protection

trade protection

government intervention aiming to limit imports and/or encourage exports by setting up trade barriers that protect from foreign competition

tariff

a tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government

quota

an import barrier that set limits on the quantity or value of imports that may be imported into a country

production subsidy (international)

an amount of money paid by the government to a firm, per unit of output, to encourage production and provide the firm an advantage over foreign competition

export subsidy

payments made by the government to exporting firms on the basis of the number of units exported

administrative barriers

trade barriers in the form of regulations that aim to limit imports into a country. these barriers may take the form of product safety standards, sanitary standards or pollution standards

why countries might not want to engage in free trade

• protect infant industries

• national security

• environmental standards

• anti-dumping

• unfair competition

• government revenue

• domestic job protection

• ELDC diversification

winners from tariffs

• domestic producers are better off

• domestic employment in protected industry increases

• government gains tariff revenues

losers from tariffs

• domestic consumers are worse off

• domestic income distribution worsens (regressive tax)

• increased inefficiency in production

• foreign producers are worse off

• global misallocation of resources

calculations: consumer expenditure from tariffs

consumer expenditure = P x Q

consumer expenditure before tariff = Pw x Q2

consumer expenditure after tariff = (Pw + T) x Q4

calculations: consumer surplus from tariffs

consumer surplus before tariff = (max price consumers pay - Pw) x Q2 / 2

consumer surplus after tariff = (max price consumers pay - (Pw - T)) x Q4 / 2

calculations: domestic producer revenue from tariff

domestic producer revenue = P x Q

domestic producer revenue before tariff = Pw x Q1

domestic producer revenue after tariff = (Pw + T) x Q3

calculations: producer surplus from tariff

producer surplus before tariff = (Pw - min price to sell) x Q1 / 2

producer surplus after tariff = ((Pw + T) - min price to sell) x Q3 / 2

calculations: foreign producer revenue from tariff

foreign producer rev = Pw x import quantity

foreign producer rev before tariff = Pw x (Q2 - Q1)

foreign producer rec after tariff = Pw x (Q4 - Q3)

calculations: gov’t revenue from tariff

gov’t rev = tariff x import quantity

gov’t revenue = T x (Q4 - Q3)

anti-dumping

tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price

• dumped good: one that is exported at a price below cost of production

winners from quota

• domestic producers are better off

• domestic employment in protected industry increases

neutral impact from quota

• the gov’t = no gain or loss

losers from quota

• domestic consumers worse off

• domestic income distribution worsens (regressive)

• increased in efficiency in production

• foreign producers are both worse and better off

• global misallocation of resources

quota diagram

winners from production subsidies

• domestic producers are better off

• domestic employment in protected industry increases

• consumers are not affected

losers from production subsidies

• gov’t budget loses

• taxpayers are worse off

• increased inefficiency in production

• exporting countries are worse off

• global misallocation of resources

export subsidy diagram

winners from export subsidies

• producers better off

• domestic employment increases

losers from export subsidies

• consumers are worse off

• gov’t budget loses

• taxpayers worse off

• domestic income distribution worsens

• exporting countries worse off

• global misallocation of resources

production subsidy diagram