PROTECTIONISM
SHARLEAN MAYNE-LAWSON
DEFINE
PROTECTIONISM
• This is the act of denying entry for trade
or commercial activities.
• It is a deterrent to free trade. This is
counter -productive to the goals of the
WTO.
• However many countries see it necessary to
protect themselves against unfair trade
competition on the world trade scene.
• Many countries are at a cross road between
the desire for trade liberalization and the
need to protect themselves
necessary to protect themselves
against unfair competition in
international trade (Most
developed countries have access
to advanced technology and have
more mature and developed
industries)
REASONS
FOR
PROTECTIONIS
M
• Free trade usually benefits
developed countries rather than
developing countries
• Protects the infant industries
in the Caribbean, giving them
time to grow (Note: excessive
protectionism might cause them
not to grow)
• Strategic industries – an industry
may hold the key to a country’s
growth and development and it can
be argued that it is a strategic
industry e.g. tourism
REASONS FOR
PROTECTIONIS
M
• Anti-dumping duty – Dumping exists
when goods that are imported are
sold below their fair market value
in local market. This means that
local products cannot compete
effectively with imported products
• Externalities – an industry may
offer valuable externalities or
spin-offs for the rest of the world
and so must enjoy a measure of
protectionism
REASONS FOR
PROTECTIONIS
M
• The prevention of unemploymentmany inefficient industries may
be protected from competition
because of the desire to
preserve jobs.
•
• Temporary relief to revive
declining industries
•
• Balance of payments - Reducing
imports improves the balance of
trade
•
• Strategic industries- To protect
the manufacturing of essential
goods.
• It provides a strain on the
world’s free trade
DEMERITS OF
PROTECTIONIS
M
• Protection is offered to firms
that compete on a platform of
price over quality, the false
sense of security that it builds
and the denial of easy access to
certain products for consumers.
• Some governments provide subsidies
and loans to businesses that are
failing to compete against their
foreign competitors.
protectionism. Without a system of
competitive pricing, domestic
companies are free to raise their
prices without raising the quality of
their goods.
DEMERITS OF
PROTECTIONIS
M
• Businesses suffer from protectionism
Government support often builds
corporate complacency, which in turn
could lead a business to believe that
it has a nice safety net set up
behind it.
•
In the event of strong foreign
competition, these businesses might
not have the resources necessary to
survive on their own.
goods.
• Non-domestic companies that offer unique products and
services are also subject to the aforementioned
restrictions.
• Foreign businesses and domestic consumers face the
greatest disadvantages of trade protectionism.
•
DEMERITS OF
PROTECTIONISM
Businesses face unfair restrictions while their
domestic competitors are offered financial bonus, and
consumers end up paying higher prices for a limited
variety of products that aren't always worth their
cost.
• Note: when one country imposes trade barriers on
another country the other country retaliates by
imposing barriers on the other country.
• Smuggling and other unfair means tend to get boosted
as people will smuggled better quality products.
Protectionism through trade
restrictions can influence trade in
two ways.
• It increases the price of imported
goods sold locally
METHODS OF
TRADE
RESTRICTION
S
• Tariffs (import duties, custom
duties)
• Quotas
• Exchange rate control
• Decreases the quantity of
imported goods available for
sale. Also, called non-tariffs
barriers
• Quotas ***
• Embargos
METHODS OF
TRADE
RESTRICTION
S
• Preferential treatment
• Health and safety restrictions
• Voluntary import restrictions (VER)
• Orderly marketing arrangements (OMA)
• Labelling restrictions
by government on the value of imported
goods (cif value, which is the cost,
insurance and freight).
• A given percentage of the cif value.
However, it can trigger retaliation from
other countries
METHODS OF
TRADE
tariffs – this is a reduced
RESTRICTION • Preferential
tariff granted by one country on certain
S
goods from another country.
• It is a lower tariff or tax placed on
goods imported from a given country by
the importing country (compared with the
tariff placed on the same goods imported
from other countries)
• A developed country might grant
preferential tariff to developing
countries in order to boost the
developing country’s exports and
their economic growth.
METHODS OF
TRADE
RESTRICTIONS
• Countries in a trading group might
also grant preferential tariffs to
their partners to promote trade
within the group and develop trading
ties.
• Preferential tariffs might be put in
place for foreign policy reasons. A
country might wish to reward another
country with a lower tariff on a
• The exporting country benefits
from the lower tariff. This is
because the price of the product
in the foreign market is lower
than the same good imported from
other countries.
BENEFITS OF
PREFERENTIA
L TARIFFS
• Producers in the country who
benefits from the preferential
tariffs earn higher sales
revenue and employment in the
industry in the country which is
maintained.
• Preferential tariffs foster
stronger trading ties between
countries.
BENEFITS OF
PREFERENTIA
L TARIFFS
• Good international relationships
are developed between the
count6riee which grant and receive
tariffs.
• It gives developed countries an
opportunity to assist poorer
countries by making their exports
more competitive
• The more efficient suppliers might have
higher duties placed on their goods.
Consumers in the importing country will pay
more for goods
COSTS OF
PREFERENTIA
L TARIFFS
Consumers in the importing countries do not
benefit from the:
• availability of goods from competing
• suppliers or the best prices
• It causes other countries not getting
preferential tariff rates to become
discontent. These countries might retaliate
with negative consequences
IMPORT DUTIES
Import duties and export duties –
Levied on goods coming in or going
or going out of a country. A tariff may
A tariff may be used to increase
increase government revenue or to
or to protect an industry or product
or product from outside competition.
Specific –the duty is
imposed according to a
to a standard
measurement e.g. $1
$1 per meter of cloth
Import duties are of
are of two types:
Ad valorem – levied
according to the value
value e.g. 10% of the
the value of a car
QUOTAS
Quotas—A limited quantity of goods imported. It
increases the price of imported goods based on the
limited amount imported. The increased price will
reduce domestic demand. This does not generate revenue
for the government. Quotas fall under two categories:
• Customs quotas –Protect trade by allowing a
imports to enter a country at a favourable duty
rate for a specific duration of time. The balance
of the goods is charged at the normal import duty
Import quotas- set a quantity of the item that may be
particular period of time. The government will issue
license to the suppliers stating the maximum amount
that each is allowed to supply. Import is regulated as
only a set quantity of goods can be imported
EXCHANGE RATE CONTROL
Exchange rate control -The direct act of government to
influence the buying and selling of foreign exchange.
This is done in an effort to regulate imports and to
avoid uncertainties that are triggered by fluctuating
exchange rates.
Note, a more stable exchange rate will help the country
to achieve a balance of payment equilibrium.
Importers will be given a certain amount of foreign
exchange which will limit the quantity of imported items
purchased.
• Embargos / prohibitions- A law may ban
the importation of certain items that may
be considered dangerous to the culture or
environment of the countries.
• This is at times done for political
reasons to discourage a country from
pursuing certain political ideologies
e.g. China and Cuba
• Preferential treatment- applying special
• Health and safety restrictions- A
separate agreement on food safety
and animal and plant health
standards sets out the basic rules.
• To protect citizens from certain
diseases / danger. Persons cannot
take certain foods, plant or animals
into countries
• Voluntary Import Restrictions (VER)to get the exporting nation to
agree to voluntary reduce the
quantity of exports to the imported
Orderly Marketing Arrangements
(OMA) -The negotiation to reduce
quantity of exported items is
more organized than in VER.
The quantity is decide upon in
the negotiating process
labelling restrictions–
CONCEPTS TO KNOW
• Trade Liberalization –termination of all preferential
trade agreements worldwide. The removal of all
obstacles to trade barriers and non-tariffs barriers
in order to achieve the free movement of goods and
services across national borders. It enables more
foreign competition and foreign investment in an
economy
• Bilateral agreement- an agreement between two
countries. The agreement contains details of the
countries mutual understanding policies and
obligations on specific matters
• Multi-national agreements – Agreement between three
or more countries e.g. GATT; WTO; NAFTA
QUESTIONS and ANSWERS
Define the term ”tariff”
• A tax or custom duty imposed by government on
the value of imported goods. This tax makes the
imported goods more expensive
• *** Note: Preferential tariffs – this is a
reduced tariff granted by one country on certain
goods from another country.
• It is a lower tariff or tax placed on goods
imported from a given country by the importing
country (compared with the tariff placed on the
same goods imported from other countries)
QUESTIONS and ANSWERS
List THREE factors that influence imports to a country
• Domestic income – If domestic income is high the demand for imported
goods and services will increase. Consumers will seek a variety of
goods and services which may not be available locally or has a low
local production
• Domestic prices and inflation – If domestic prices are high or the
country is experiencing inflation; citizens will seek cheaper foreign
substitutes. Therefore the level of imports will rise
• Exchange rates – If a currency is overvalued or is high compared to
other trading partners, it will cause higher level of imports.
Consumers will seek to make use of lower relative prices after the
conversion of the stronger currency in another country
• Changes in local tastes and preferences- Since the advent of the
internet, there has been an increase in the level of telecommunication. Example, Jamaicans carve for more foreign products and
different lifestyles