Ch 24 - Free Trade and Protectionism

1. Free trade: international trade (imports and exports) without government restrictions

   • Trade of goods and services without trade barriers

2. Protectionism:

   • Protection of domestic industries against foreign competition

   • Government restrictions are placed on the imports of foreign competitors (tariffs, quotas and subsidies)

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• Arguments for protectionism:
  • Protecting domestic employment
  • Protecting the economy from low cost labour
  • Protecting the economy from low cost labour
  • Protecting an infant (sunrise) industry

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• To conclude:
  • Protectionism raises prices to the consumers and producers of the input
  • Less choice for consumers
  • Competition would diminish and domestic firms would become inefficient
  • Reduced economic growth
  • Comparative advantage is distorted leading to inefficient use of world resources

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• Types of protectionism:

  1. Tariff : a tax that is charged on an imported good. Any tax will cause suppliers to supply less

     

• If wheat (example) is not purchased there is a deadweight loss of welfare

• There is a deadweight loss of welfare

• There is inefficiency of domestic products and a loss of world efficiency

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2. Subsidy: an amount of money paid by the government to a form per unit of output

   

• Government is giving the subsidy to the fir to make it more competitive
• Domestic supply curve will shift downward reducing the price
• Consumers are indirectly affected by the government’s use of tax revenues to find the subsidy
• Could lead to higher taxes and is an opportunity cost, governments could spend taxes on other things

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3. Quotas: physical limit on the number of value of goods that can be imported to a country

   

• Excess demand of Q3Q2, prices begin to rise

• As price rises, imports are not allowed to supply more

• Domestic products begin to enter the market attracted by the high price of wheat

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3. Voluntary export restraints:

   • Agreements between exporting and importing countries in which the exporting country agrees to limit the quality of exports of a specific good below a certain level

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4. Administrative barriers:

   • When goods are imported there are always administrative processes

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5. Health, safety, and environmental standards:

   • When restrictions are put on the type of goods that can sold in the domestic market

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• Embargoes: complete ban on imports
• National embargoes: marketing campaigns to encourage people to buy domestic goods

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