Trade and Protectionism Definitions

IB Economics - Global Economy - Trade and Protectionism - Definitions

Arguments in favour of protectionism

1) To protect domestic jobs

2) To protect infant industries

3) To protect domestic firms facing unfair competition

4) To correct a balance of trade deficit

5) To raise government revenue (through tariffs)

6) Strategic reasons

Dumping

Where a country exports a good at a price below their cost of production

Tariff

An indirect tax on imports

Positive impacts of tariffs

1) Domestic producers are better off as they are selling more of the good at a high price

2) Employment in the domestic industry will increase

3) Government gains tax revenue from the tariff

Tariff revenue

Tariff per unit x quantity imported

Negative impacts of tariffs

1) Domestic consumers are worse off as they are paying a higher price and they are buying less of the good

2) Overall, the tariffs result in an inefficient allocation of resources and it causes deadweight welfare loss

3) Foreign producers are worse off as they export less

4) Retaliation is likely to hurt other domestic industries

Subsidy

Where the government pays domestic firms to produce the good

Cost of subsidy

Subsidy per unit x quantity sold

Positive impact of subsidies

1) Domestic producers are better off as they sell more and receive a higher price

2) Employment in the protected domestic industry increases

3) The price does not increase for domestic consumers

Negative impact of subsidies

1) Significant cost of subsidy to government

2) Foreign producers are worse off as their exports decrease

3) Overall this causes a misallocation of resources and causes deadweight welfare loss

4) Could cause retaliation

Quota

A limit on the quantity that can be imported

Positive impact of quotas

1) domestic producers are better off, because they are producing more and receiving a hgiher price

2) Employment in protected domestic industry will increase

3) Foreign producers who get a quota allocation will be better off as they receive a higher price

Negative impact of quotas

1) Domestic consumers are worse off as they have to pay a higher price

2) Foreign producers who do not get a quota allocation will be worse off

3) The government is worse off as there are administrative costs and there is no tariff revenue

4) Overall the quota causes a global misallocation of resources and deadweight welfare loss

Advantages of free trade

1) Specialisation by countries results in a more efficient allocation of resources

2) Firms have access to larger markets

3) Increased competition should result in lower prices

4) Greater choice for consumers

5) Political benefits

Free trade

Refers to international trade that is not subject to any trade barriers

Protectionism

Refers to policies that aim to restrict the flow of imports into a country

Examples of protectionist policies

1) Tariffs

2) Quotas

3) Subsidies on domestic goods

4) Administrative barriers (e.g. paperwork on exports to the EU)

5) Export controls

Trade strategies for economic development

1) Import substitution

2) Export promotion

3) Economic integration

Import substitution

A growth strategy in which you move consumption away from imports and towards domestically produced goods

Export promotion

A growth strategy which looks to increase exports as much as possible

Economic Integration

Joining trading blocs in order to increase access to markets for your exporting firms

Free trade area

Trade barriers are removed between member countries

Advantages of a free trade area

1) Results in trade creation

2) Greater access to markets

3) Should increase foreign direct investment

4) You are still able to make seperate trade deals with other countries

Disadvantages of a free trade area

1) Administrative barriers still exist

2) Can result in trade diversion (HL)

Customs union

A free trade area with common external barriers on goods imported from outside the bloc

Advantages of a customs union

1) Reduces trade frictions

2) Gives greater access to markets, increases trade and increases FDI

3) Membership of a customs union allows for more bagaining power when making other free trade agreements

Disadvantages of a customs union

1) Members of customs unions cannot make their own trade deals

Common Market

Customs union with free movement of factors of production

Advantages of a common market

1) Increases FDI

2) There are greater employment opportunities for citizens

3) More efficient allocation of labour

Disadvantages of a common market

1) Large scale immigration causes social/political problems

Monetary union

A number of countries adopt a common currency and a common monetary policy

Advantages of a monetary union

1) Eliminates transaction costs and exchange rate risk when exchanging currencies

2) Greater price transparency

Disadvantages of a monetary union

1) Loss of independent monetary policy

2) Exchange rates are not able to adjust to make the economy more internationally competitive