Prelims 2

Trade barriers

Are policy instruments used by governments to regulate the flow of goods and services across borders.

Protectionism

Is the underlying economic philosophy or policy orientation that justifies the use of these barriers.

It is rooted in the belief that domestic economic interests should be safeguarded against foreign competition.

Price Distortion

Supply Restriction

Competitive Advantage Manipulation

Three core economic channels

Price Distortion

Tariffs increase the cost of imported goods, making them more expensive than domestic alternatives. This artificial price increase shifts consumer demand toward local products.

Supply Restriction

Qoutas and impact limits reduce the availability of foreign goods. This creates scarcity, allowing domestic procedures to capture a larger market share.

Competitive Advantage Manipulation

Subsidies lower production costs for domestic firms, enabling them to compete more aggressively both locally and internationally.

Tariffs (Taxes on Imports)

Qoutas (Quantity Restrictions)

Subsidies (Financial Support)

Non-tariff barriers (NTBs)

Types of Trade barriers

Tariffs

Are the most direct and transparent form of trade restriction.

They are taxes imposed on imported goods, which immediately increase the cost of foreign products in the domestic market.

Qoutas (Quantity Restrictions)

Directly limit the physical volume of goods that can be imported over a specific period.

It controls supply rather than price.

Subsidies (Financial Support)

Are government-provided financial assistance to domestic firms, aimed at lowering production costs and enhancing competitiveness.

Direct cash payments

Tax reductions or exemptions

Low-interest or government-backed loans

Forms of Subsidies

Non-tariff barriers (NTBs)

Are indirect, often less visible restrictions that regulate how goods enter a country.

They are increasingly used because they are more subtle than tariffs or qoutas.

Product standards (health, safety, environmental requirements)

Import licensing systems

Complex customs procedures and inspections

Administrative delays or documentation requirements

Common forms of NTBs

To advance broader economic, political, and strategic objectives

Why government use protectionism

Infant industry argument

One of the most widely cited justifications for protectionism.

It is grounded in the idea that new or emerging industries lack the capacity to compete with well-established foreign firms.

Higher production costs

Limited access to technology

Lack of economies of scale

Young industries often faces

Grow and stabilize

Build technical expertise and efficiency

Achieve competitiveness overtime

Protection allow infant industry argument to:

It may lead to dependency and inefficiency instead of development

Protection is temporary for infant industry argument

Strategic trade policy

Government may intervene to support industries that are considered strategically important for future economic growth or global competitiveness.

Involve advanced technology or innovation

Generate high-value-added outputs

Create spillover effects

Strategic trade policy industries typically:

Strengthen their position in global markets

Capture larger shares of high-profit industries

Reduce reliance on foreign technological dominance

Through protectionist measures, governments aim to: (Strategic trade policy)

Employment and Political Stability

Protectionism is often driven by domestic political and social considerations, particularly the need to preserve jobs.

Job losses

Wage declines

Economic decline in specific regions

Industries exposed to foreign competition may experience:

Protect employment levels

Maintain economic stability in vulnerable sectors

Prevent social unrest and dissatisfaction

By imposing trade barriers, governments aim to:

National security

Certain industries are considered essential for a country’s survival and independence, particularly during crises such as conflicts, pandemics, or global disruptions.

Food production

Energy supply

Defense and military equipment

National security includes:

Ensure self-sufficiency in critical goods

Avoid overdependence on foreign suppliers

Maintain control over strategic resources

Governments use protectionism for National security to:

When trade barriers are imposed:

Countries may produce goods outside their area of inefficiency, leading to higher production costs

Resources are misallocated to less productive industries

Overall global output becomes less efficient and more expensive

Market inefficiency

Trading partners may respond with their own restrictions

Diplomatic tensions can escalate into trade disputes or trade wars

International cooperation weakens, especially like the WTO

Trade retaliation and conflicts

Declines in international trade volumes

Reduced foreign investment

Increased uncertainty for businesses operating across borders

Causes if conflicts reduce trust and stability in global markets

Increasing the cost of imported raw materials and intermediate goods

Causing delays at borders due to stricter regulations or inspections

Creating uncertainty in sourcing, as firms may need to frequently change suppliers

Trade barriers interfere with Supply chain disruptions by:

Higher production and operational costs

Reduced efficiency in manufacturing and distribution

The need for firms to redesign supply chains, often shifting toward regional or localized production

Supply chain disruptions lead to:

Price increase due to reduced competition and limited supply

Product variety declines, limiting consumer choice

Domestic producers may face less pressure to improve quality, leading to potential declines in product standards

When imports are restricted:

Low income households, which spend a larger share of their income on basic goods

Consumers in smaller or developing markets with fewer domestic alternatives

When imports are restricted, it affects:

Global institutions

It promotes stability, fairness, and development.

These organizations help countries manage economic challenges, reduce trade conflicts, and participate more effectively in the global market

WTO

International Monetary Fund

World Bank

Three global institutions

World Trade Organization

It serves as the primary body governing international trade rules.

It ensures that trade flows as smoothly, predictably, and freely as possible.

Establishes and enforces global trade rules

Promotes free and fair trade through negotiations

Resolves trade disputes between countries

Jey functions of WTO

International Monetary Fund

It focuses on maintaining global financial stability, which is essential for sustaining international trade

Provides financial assistance to countries in crisis

Monitors global economic trends

Offers policy advice and technical support

Key functions of IMF

World Bank

It supports long-term economic development, particularly in developing countries, which strengthens their participation in global trade.

Funds infrastructure and development projects

Supports poverty reduction initiatives

Promotes economic and institutional reforms

Key functions of World Bank

Absolute advantage

Comparative advantage

Classical trade theories

Absolute advantage (Adam Smith)

When it can produce a good more efficiently than another country using fewer resources.

This theory emphasizes differences in productivity and encourages countries to specialize in goods they can produce most efficiently.

Comparative advantage (David Ricardo)

It focuses on opportunity costs, in which countries specialize in producing goods they can produce at the lowest opportunity cost relative to other goods.

Heckscher-Ohlin theory

New trade theory

Michael Porter’s Diamond Model

Modern trade theories

Heckscher-Ohlin theory

Developed by Bertil Ohlin and Eli Heckscher which states that countries export goods that use their abundant resources and import goods that require resources they lack.

New trade theory

It explains trade in terms of economies of scale and market advantages.

It highlights how producing goods in large quantities reduces costs and how early entry into an industry can lead to global dominance.

Michael Porter's Diamond Model

This model explain national competitive advantage through factors such as skilled labor.

It emphasizes innovation and the business environment as key drivers of success.

Trade patterns

It was influenced by differences in factor endowments.