Trade Protectionism

Free trade

Trade of goods and services between countries without any restrictions or government intervention

Trade protectionism

barriers that prevent the free trade of goods and services

tariffs

taxes imposed on imported goods, raising the world price of imports

quotas

legal limit to the quantity of a good that can be imported

protection subsidies

subsidies provided to domestic firs, intended to protect domestic firms that compete with imports

benefits of trade (11)

• increased domestic production and consumption due to specialization

• economies of scale

• greater choice for consumers

• increased competition resulting in greater efficiency in production

• lower prices for consumers

• acquiring needed resources

• improved global allocation of resources through specialization

• sources of foreign exchange

• flow of new ideas and technology

• interdependence among countries, reducing the risk of violence and hostilities

• engine for growth

arguments against protectionism (8)

• producers and workers are the only beneficiaries

• higher cost of production and reduced efficiency

• consumers lose in most cases, except subsidies

• income distribution worsens except subsidies due to higher prices

• foreign producers are worse off

• worsens global resource allocation

• negative impact on export competitiveness if protectionist policies are implemented on FoP, raising the domestic CoP

• trade wars

arguments for protectionism (5)

• protect infant industries that do not enjoy economies of scale that larger, mature foreign firms do

• strategic trade policy: high tech industries representing a source of future economic growth may require protection

• national security for sensitive industries like military equipment (but national security is a normative concept, prone to abuse)

• health and safety and environmental standards to protect consumer welfare

• efforts of a developing country to diversity, reducing over-reliance on certain industries

consequences of tariffs (6)

• worsens income distribution

• increased employment

• growth due to increased economic output, while imports fall

• inflation

• global misallocation of resources

• inefficiency in production

consequences of tariffs (6)

• worsens income distribution

• increased employment

• growth due to increased economic output, while imports fall

• inflation

• global misallocation of resources

• inefficiency in production

implied consequences of subsidies

• demand pull inflation due to increased employment/increased output in the future

• global misallocation of resoruces

• inefficient domestic production