Chapter 11
International Trade II
--- Protectionism
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Contents:
• Reasons for protectionism
• Economic effects of tariff and quota
• Differences between tariff and quota
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Reasons for Protectionism
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What is protectionism?
Protectionism
 is the arguments for and the actions of
imposing measures
 to restrict international trade and
 to protect a country’s own interest
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Non-economic reasons
1. Protect strategic industries that are essential to the
security and survival of the country
2. Protect industries that are regarded as symbols of
progress and development
3. Prohibit the trading of harmful goods like drugs
4. Prevent the export of advanced technology
5. Set up economic sanctions for political reasons
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Economic reasons
1. Protect infant industries temporarily
2. Provide a transitional period for the industrial base
to change
3. Fight against dumping
4. Prevent over-concentration by diversification
5. Correct market distortion
6. Deter foreign protectionist measures
7. Improve the terms of trade
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Misconceptions
 Trade is a zero-sum game that a country’s gain is the
other’s loss (being exploited).
 A country will lose money and job opportunities in
buying foreign products instead of domestic products.
 If foreign wage rates are lower than domestic wage rates,
under competition, local workers will have to lower their
wage rates and living standard.
 Import restriction is an effective and efficient means to
lower the unemployment rate.
 Free trade benefits everyone.
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Conclusion
 Free trade is better than no trade as it raises the
world’s output and brings many other benefits to the
trading countries.
 However, restricted trade is sometimes more
beneficial than free trade to the country practising
protectionism.
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Means of Protection
Tariff
 a tax imposed on imports to raise their prices
Quota
 a maximum quantity limit on imports
Subsidies on exports or import-competing industries
 to improve their competitiveness.
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Embargo
 a ban on trade
Exchange control
 Exporters have to sell their foreign
currencies earned to the monetary
authority at fixed exchange rate
while importers have to apply from the
authority for using foreign currencies
in external payments.
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Economic Effects of
Tariff and Quota
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The situation without trade
(the autarky situation)
P
Domestic supply
under autarky
Consumer’s
surplus
Total surplus
Pd
Producer’s
surplus
Domestic
demand
0
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Q1
Q
The situation with free trade
P
Domestic supply
under autarky
Pd
Domestic supply
with free trade
Pw
Domestic
demand
Import
0
PO0
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Q1
CO0
Q
P
New
consumer’s
surplus ()
Domestic supply
under autarky
New total
surplus ()
Pd
Domestic supply
with free trade
Pw
New
producer’s
surplus ()
0
Domestic
demand
Import
PO0
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Q1
CO0
Q
P
Domestic supply
under autarky
New total
surplus with
trade ()
Old total
surplus
(without Pd
trade)
Gain from free trade
Domestic supply
with free trade
Pw
Domestic
demand
Import
0
PO0
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Q1
CO0
Q
The situation after the imposition of tariff
Domestic supply
under autarky
P
Pd
Domestic supply with tariff
Pw + t
Pw
New
import
Domestic supply
with free trade
Domestic demand
0
PO0 PO1
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CO1 CO0
Q
The situation after the imposition of tariff
Domestic supply
under autarky
P
New
consumer’s
surplus ()
Pd
Domestic supply with tariff
Pw + t
Pw
New
import ()
New
producer’s
surplus ()
0
PO0 PO1
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CO1 CO0
Domestic supply
with free trade
Domestic demand
Q
Government revenue
= Tariff x Amount imported
Compared with the situation with free trade
Domestic supply
under autarky
P
Total
surplus
with free
Pd
trade
Domestic supply
with free trade
Pw
Import
0
PO0
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Q1
Domestic
demand
CO0
Q
Deadweight loss under tariff
Domestic supply
under autarky
P
Deadweight losses
Pd
Domestic supply with tariff
Pw + t
Pw
Domestic supply
with free trade
New
import
0
PO0 PO1
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CO1 CO0
Domestic demand
Q
The situation after the imposition of quota
P
Domestic supply
under autarky
Domestic supply
with quota
New CS
+ PS
Pd
Domestic supply
with free trade
New
import
Quota
0
PO0 PO1
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Domestic demand
CO1 CO0
Q
P
Domestic supply
under autarky
Deadweight losses
Domestic supply
with quota
Pd
Domestic supply
with free trade
New
import
Domestic demand
0
PO0 PO1
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CO1 CO0
Q
Additional loss if the quota is
allocated by non-price method
Other effects
1. Quality of products is improved
2. Wealth redistribution
 The one who gains in domestic country –
import-competing industries; government; society
 The one who loses in domestic country –
consumers
 The one who gains in foreign country –
consumers
 The one who loses in foreign country –
export industries; society
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Differences between
Tariff and Quota
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Nature
Wealth
redistribution
Amount of
imports
Tariff
Quota
A tax
A quantity restriction
Does not raises the
government revenue
Raises the
unless it is auctioned
government revenue
off by the
government
A variable
depending on the
elasticity of
Fixed
domestic demand
for imports
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Tariff
Deadweight
losses
Quota
Loss in the gain from Additional loss if the
trade (CO) and loss quota is allocated by
from extra cost (PO)
non-price method
Market power
Domestic producers
Domestic producers
of domestic
may raises the
cannot raises the
producers
domestic price by
domestic price
reducing their output
Result of
changes in
The amount of imports
The amount of
market
is variable
imports is fixed
situations
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Correcting Misconceptions:
1. Import restriction reduces the amount of imports
and raises the terms of trade.
2. Free trade is better than no trade and restricted
trade.
3. Buying domestic products instead of foreign
products keeps both money and jobs in the
domestic country.
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Correcting Misconceptions:
4. Free trade is beneficial to everyone.
5. The imposition of a tariff and a quota brings the
same results to an economy.
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