Economics
Chapter 26: Protectionism (Barriers to free trade)
A. Impacts
I. Tariffs
- Tax imposed on imports (and sometimes exports)
- Tariffs are usually a tax mechanism
- Import tariffs tend to be good for domestic producers and the government
but bad for domestic consumers
1. Import Tariffs
Two reasons for governments to impose tariffs:
- Discourage consumption of imports
- Raise tax revenue
Analysis/Evaluation:
- Tariffs are only effective in raising revenue if demand for imports is price
inelastic (Producers still selling it)
- More effective in protecting the domestic industry if demand for imports is
price elastic. (People willing to give up buying it)
2. Export Tariffs
- Restriction on what can be exported from the country
- If export demand is price inelastic, export tariffs will have a minimal impact
on demand.
- Export tariffs can act as a form of protectionism if placed on raw materials
- Protection for domestic industries
BRICS + Export Tariffs
- Although SA is rich in rare earth metal, they are in free trade, so South Africa.
Revision
At P, domestic produce 35k, demand 84k so import 49k
At P2, domestic produce 46k, demand 70k, so import 24k, so a
decrease in 25k
II. Import Quotas
- Limits on imports (usually limited by quantity)
- This usually disadvantages consumers due to higher prices and fewer
products being consumed.
Quotas usually do not raise revenue for the government. For instance:
- Sellers of imports extra amount of unit paid by consumers
- The government can raise revenue by selling licenses to foreign firms to sell
an allocation of the quota.
III. Export subsidies
- Subsidies may be given to both exporters and those domestic firms
competing with imports
- Domestic firms in both cases see a reduction in costs
- Encourage firms to increase output and lower prices
- Increase market share domestically and in foreign markets.
The losers here are foreign firms and domestic taxpayers (they don’t get to
choose where to subsidise).
- Domestic producers benefit from this
- Consumer benefit in the long run
In the long run, they may lose if more efficient foreign firms are driving out of
the economy and subsidised businesses increase their prices.
IV. Embargoes
- Complete ban on either import of a products or trade with a country
Banning products might be harmful for an economy
Embargoes can be an act for political disputes
V. Voluntary export restraints
- Agreement by exporting countries to restrict the amount of product it sells to
importing country
- Exporting countries may be pressured to sign an agreement or agree in
return for the importing country also agreeing to limit exports it sells of
another product
VI. Red Tape
- Administrative paperwork to discourage import
- Artificial high product standards to restrict foreign
- competition
- Restricts consumer choice
VII. Exchange control
- Governments can limit the amount of foreign exchange that can be
purchased to buy imports, travel abroad or invest abroad
B. For and against
I. Protectionist policy
1. Main reason for Protectionism
a. Infant Industry – to protect emerging industry until they have achieved
economies of scale
b. Sunset Industry Argument – use tariffs to slow the decline of older
sectors and limit risks of structural unemployment
c. Diversify an economy that is too dependent on one product
d. Raise tax revenues (this is especially important for many developing
countries who have a limited domestic tax base)
e. Improve the trade balance where there is a large trade deficit and a
country that is running low on foreign reserves.
f. Prevention of unfair practices such as export dumping
2. Export Dumping
a. Export dumping happens when a country or a company exports its
products to another country at a price significantly lower than the cost of
production or the price charged in the home market
This is often seen as an unfair trade practice because it can harm
domestic industries in the importing industry by undercutting their prices
and potentially driving them out of business.
- Dumping can distort competition and lead to trade tensions between
countries.
- For example, in the 2010s, China became a dominant player in the solar
panel industry. Chinese manufacturers were accused of export dumping
as they flooded the market with solar panels at prices allegedly below
their cost of production.
- Anti-dumping import tariffs are one form of intervention when dumping
happens
II. Evaluation
1. Against (criticism)
- Resource misallocation – a loss of allocative & productive efficiency.
- Dangers of retaliation – and therefore risks of a persistent trade war
that reduces economic growth and real living standards
- Potential for corruption with tariff revenues misappropriated.
- Higher prices for consumers – a regressive impact on poorer people.
- Higher costs - tariffs push costs up for home producers which damages
their competitiveness, such as a construction company using steel.
- Barrier to entry – import controls increases monopoly power of
domestic firms – again leading to higher prices for consumers
III. Protectionism in practice
1. Vietnam
- Export subsidies to new infant industries (EVs, electronics
manufacturing, renewable energy)
- Voluntary export restraints, to protect the supply of the domestic
market, imbalance of market
- Red tape: Restrict imported goods quality and regulations, protect
local industry.
Historical:
- The Policy of “closing the door and sealing the port” of the Nguyen
Dynasty in the 19th dynasty (1800s) (Isolation).
27/03/2025
1. Japan’s action is similar to an act of embargoing South Korea’s
semiconductor sector due to their fear of Korea’s competitiveness in
the SAME industry. By placing a ban, they are removing Korea as
their competitor, or at least reducing their raw material to protect
Japanese Electronics manufacturers.
2.
- To ensure a sustainable supply of raw materials for semiconductor
production in Japan
Political or diplomatic tension or economic leverage
– Reduced supply of onion
- Onion prices rise over the affordability of Indian
- They are a major consumer of onions, so they prioritise their local
market, an act of food security policy rather than trade competition
purpose like Japan.
4.
- their supply of raw materials
- their exporting partner of the materials
- Market share of the semiconductor industry in Japan vs South Korea.
Who is the leading exporter or producer?
- TPC, TOT of Korea and Japan, who has more competitive advantage
and competitive in export.
- Political context or tension
5.
- Endangered species (protect biological diversity)
- Weapons (strategic technologies)
- Cultural Relics (Cultural heritage)
- Natural wooden products (protect forest diversity)
Task - 26.4
WTO mission:
- A forum for members to negotiate and sign more free trade
agreements
- Resolve Trade disputes
- Review members’ trade policies
Task of WTO member:
- Promoting free trade, abiding by trade rules
- Reducing trade barriers
- Fair trade, no adv between national products and exporter
- Ensure transparency of trade
Benefit:
- Trade security
- Vast market access
- Allow more specialisation and increase in income
- Promote Globalisation
- Access to the vast amount of resources
Algeria economy
GDP nominal: $247.6B (2023)
GDP (PPP): $699.818B (2023)
Real GDP growth: 4.1% (2023)
Main exports: natural gas, crude petroleum, refined petroleum, fertilizers, iron bars (2023)
Main trading partners: Italy 29%, France 14%, Spain 13%, USA 6%, Netherlands 4% (2023)