PROTECTIONISM

TARIFFS, QUOTAS, TRADE AGREEMENTS

ARLAN P. BELEN
Presentor
PROTECTIONISM
 Every country has established
some barriers to trade.
 A protectionist policy is one in
which a country restricts the
import of some goods and
services produced in foreign
countries.
 Reason: to protect companies
and workers in the home
economy from competition by
foreign firms.
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Trade Barriers
It is a general term that describes any
government policy or regulation that
restricts international trade. The barriers
can take many forms, including the
following terms that include many
restrictions in international trade within
multiple countries that import and export
any items of trade:
- Trades - Import licenses
- Export licenses - Import quotas
- Subsidies - Non-tariff barriers
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Most trade barriers work on the same
principle; the imposition of some sort of cost
on trade that raises the price of those
products.

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Tariffs
 Tariffs are usually associated
with protectionism, the
economic policy of restraining
trade between nations.
 For political reasons; tariffs are
usually imposed on imported
goods, although they may also
be imposed on exported goods.
 A prohibitive tariff is so high
that nearly no one imports any
of those items.
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 A non- prohibitive tariff is a
lower tariff that would injure but
not kill off trade.
 It tends to raise price, lower the
amounts consumed and
imported, and raise domestic
production.

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Quotas
 A quota is a direct restriction on
the total quantity of a good or
service that may be imported
during a specified period.
 Quotas restrict total supply, and
therefore increase the domestic
price of the good or service on
which they are imposed.
 Quotas generally specify that an
exporting country's share of a
domestic market may not
exceed a certain limit.
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Comparison
The difference between Tariffs and Quotas
Tariffs Quotas
• Tariffs increase costs to foreign • Quotas do not
producers • A quota raises price but not
• Tariff will reduce the profits of costs of production and thus
foreign exporters of a good or may increase profits.
service.

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Impact of Protectionist Policies
 Protectionist policies reduce the
quantities of foreign goods and
services supplied to the country
that imposes the restriction.
 As a result, such policies shift the
supply curve to the left for the
goods or services whose imports
are restricted.
 As shown, the supply curve shifts
to S2. the equilibrium price rises to
P2, and the equilibrium quantity
falls to Q2

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Economic Costs of Tariff
There are three effects:
 The domestic producers can expand production
 Consumers are faced with higher prices and
therefore reduce consumption
 Government gains tariff revenue
 
Non-economic Goals
National security is one of the major non-economic
goals in trade policy. A nation should not sacrifice its
liberty, culture, and human rights for some extra
income.

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UNSOUND GROUNDS ON TARIFFS
 Mercantilism is a theory that says a
nation’s power is based on its wealth.
 It suggests that the ruling government
should advance these goals by playing a
protectionist role in the economy by
encouraging exports and discouraging
imports, notably through the use of
subsidies and tariffs, respectively
 

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Cheap foreign labor and outsourcing
 A particularly controversial issue in
industrialized economies is outsourcing,
in which firms in a developed country
transfer some of their activities abroad in
order to take advantage of lower labor
costs in other countries.
 Generally speaking, the practice of
outsourcing tends to reduce costs for the
firms that do it.
 These firms often expand production and
increase domestic employment.

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Retaliatory tariffs
 It usually leads other nation to raise their
tariffs higher and is rarely an efficient
bargaining chip for multi-lateral tariff
reduction.
 A tax that a government charges on
imports to punish another country for
charging tax on its own exports:

Example: China responded by saying it

would impose retaliatory tariffs on a broad
range of US products.

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Import relief
 It is any of several measures, imposed
by a government, to temporally restrict
imports of a product or commodity to
protect domestic producers from
competition.
 Or, any of several measures such as
subsidies, educational and training
assistance to workers, low interest loans,
tax relief and so on to strengthen
domestic producers.

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POTENTIALLY VALID ARGUMENTS FOR PROTECTION

A. Purely Economic Arguments

1. The Terms of Trade or Optimal Tariff Argument
This theory argues that a country that is a large importer of a
particular commodity can shift the economic burden of an
import tariff from domestic consumers to foreign suppliers if the
country is a primary buyer from many competing suppliers.
2. Infant Industries
A new domestic industry with potential
economies of scale is called an infant industry.
One argument for trade barriers is that they
serve as a kind of buffer to protect fledgling
domestic industries. 15
3. Tariffs and Unemployment
A powerful motive for protection has been the desire to
increase employment during a period of recession. Protection
creates jobs by raising the price of imports and diverting
demand towards domestic production.

4. Protection Against Dumping

Dumping is said to occur when a country or company exports a
product at a price that is lower in the foreign importing market
than the price in the exporter’s domestic
market. This is to unfairly gain market share.

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B. Non-economic arguments
Protection for its own sake rather than to increase output or
income, above what it would otherwise be. For example,
industrialization at any price, or self-sufficiency for strategic
reasons, would be arguments of this type.

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NEGOTIATING FREE TRADE
 The world trade had badly suffered on
account of the restrictive trade practices
adopted by the different countries during the
World War II.
 Countries were keen to set a new system of
world trade, where dangerous protective
practices could be avoided and the world
community could have the benefits of free
trade.

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1. Multilateral Agreements
 The General Agreement on Trade and
Tariffs (GATT) was concluded in Havana
in 1947, after a series of negotiations
between the participating countries.
 The membership of the GATT as on April,
1995, was 121, which together accounted
for about 90 percent of world trade.
 The member-countries have entered into
agreements in respect of the following:
The principles of 'most favored nations’
(MFN) have been adopted.
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2. World Trade Organizations
 WTO started functioning from January 1,
1995 and has substantially increased powers
to enforce International Trade Agreements.
 The WTO is different from and an
improvement over the GATT in the following
respects:
 The WTO is more global in its
membership.
 The WTO has introduced commercial
activities into the multilateral trading
system.

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 GATT provisions in case of disputes were
time-consuming; GATT could levy
penalties only through unanimous
decision, which were virtually impossible.
 Under WTO, unanimous decisions are no
longer desired: all disputes are to be
settled within 18 months.
 WTO has one-country one-vote principle,
unlike in the World Bank and IMF where
the economic strength of rich countries
translates into a voting majority.

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 The World Trade Organization (WTO) was
established to ""help trade flow smoothly,
freely, fairly and predictably” among member
nations.
 In 2005, it had 153 member countries.
 Since World War II, the General Agreement on
Tariffs and Trade (GATT)- WTO’s predecessor
- and WTO have generated a series of
agreements that slashed trade restraints
among members.
 These agreements have helped propel
international trade, which in 2006 was more
than 35 times its level in 1950.
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 But the negotiations leading to these
agreements have always been protracted and
tumultuous and issues of nationalism and
patriotism are often not far from the surface.
 Although there are many arguments in favor of
such restrictions on free trade, economists
generally are against protectionist measures
and support free trade.

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ThankYou
Arlan P. Belen
0939 915 9171
[email protected]