MCOM chapter 3

protectionism

protectionism (definition):

an economic policy that restricts imports from other countries through tariffs, quotas, and other regulations to support domestic industries and jobs

reasons for protectionism:

1) to protect infant industries (2)

• new industries in developing countries are less efficient than foreign competitors

• little time to develop skilled management, exploit efficient technologies. 

reasons for protectionism:

2) to correct a balance of trade deficit (2)

• custom duties will cause the price of imported goods to rise

  → import falls

• discourage consumption of foreign goods.

reasons for protectionism:

3) to diversify the economy

• avoid dependence on one or two commodities which they have comparative advantage.

• price fluctuation on these goods will affect national income and employment

reasons for protectionism:

4) to prevent dumping (3)

• foreign producer dumping goods in the country below cost of production

• domestic production disrupted

• foreign producer to force domestic producers out of business and world market to gain greater market share

reasons for protectionism:

5) national security (2)

• to protect an industry which is important for national security

• a country does not want to be dependent on foreign energy suppliers or foreign steel

reasons for protectionism:

6) protect against “unfair” foreign competition (2)

• foreign countries subsidise their goods. 

• unfair advantage

reasons for protectionism:

7) retaliation

to retaliate against another country who has imposed trade restriction that hurt domestic producers

reasons for protectionism:

8) encourage social policies (3)

to:

• maintain a balance between urban and rural life and population

• protect agricultural industries from external competition

• minimise further depopulation of the countryside

reasons for protectionism:

9) to enable industries to decline gradually (3)

• some industrial countries may find that they cease to have comparative advantage in certain industries, e.g. textile in UK, steel plants in USA

• they need to transfer their factors of production into specialisation in other areas

• protection is provided in the short run to allow time for other industries to develop

reasons for protectionism:

10) flag discrimination

restriction on certain industries based on country of origin to protect domestic markets

custom duties refer to:

taxes imposed on imported goods to raise revenue and protect domestic industries

trade deficit refers to when:

imports > exports

domestic producers refer to:

businesses that produce goods or services within a country, often protected by trade policies

methods of protectionism:

1) tariffs refers to:

• tax imposed by the importing country when goods cross an international boundary

  → provides revenue to government

  → price of import goods is higher than local goods

  → local goods become more competitive

methods of protectionism:

1) tariffs are levied in two ways:

• ad valorem basis

  → as a % of the price of the import

• specific duty

  → a fixed amount is added per unit as tax

methods of protectionism:

2) quota (2)

• is a quantitative restriction on the import of a particular good

  → specifies the max. amount of the good that may be imported in a given time

• restricts the amount the foreign producers can sell

  → cause the price of foreign goods to increase

  → demand of local goods will increase

methods of protectionism:

2) quota may be imposed in 3 ways:

by value:

• limitation is not on the specific number of units of a commodity but on the amount of money spent on that commodity

by quantity:

• require import licenses and permission to import a fixed no. in a given period

by market share:

• limit of import is based on share of the total sales

methods of protectionism:

3) exchange controls (3)

• limits the amount of foreign exchange made available to importers or to citizens travelling abroad, or for investment

• to restrict the movement of money out of the country

• to maintain a country’s rate of exchange

methods of protectionism:

4) embargo

complete prohibition of the export or import of specific commodities as a measure of protection for social and political reasons

methods of protectionism:

5) subsides

• payment by a government agency to the producers of goods to lower the price of goods

• export subsidies - such as special tax reliefs, the provision of cheaper raw materials or a special lower charge to reduce the cost of production to compete in international market

World Trade Organisation (WTO) is:

the only organisation body dealing with the rules of trade between nations

functions of WTO (6)

1) Administering WTO trade agreements

2) Organise trade negotiations to achieve further liberalisation

3) Settle trade disputes between governments

4) Technical assistance and training for developing countries

5) Co-operation with other international organisations

6) Help trade flow smoothly in a system based on rules