IB Econ Study Guide Internationals - Sunny Hills High School

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Forms of protectionism Protectionism can take various forms. The most common forms are: tariffs, quotas, voluntary export restraints, subsidies, regulatory barriers (product standards), as well as a host of other measures such as antidumping duties, exchange controls, non-automatic import authorization (import licences), etc. Bear in mind that non-tariff barriers include those barriers that do not directly affect the price of the good. Tariffs A tariff is defined as a tax imposed on imports. lt has been the most common form of protection. lt may be specific or ad valorem. A tariff will tend to raise the price and domestic production while lowering ihe amounts consumed and imported. These effects are illustrated in Fig.4.4. Assume the market for some good and let the world price be at P At B domestic firms will offer Q1 units per period while domestic consumption will be Q2 units. lmports will be Q'1Q2 units per period, the difference (Q2-Q1). Let a tariff now be imposed. The tariff will raise the domestic price to P' (note that it will not affect the world price as it is assumed that the country is'small' in the sense that its production/consumption decisions are insignificant and do not affect the world price). The tariff is thus PP' per unit. Domestic production will rise to Q3 units per period while domestic consumption drops to Q4 units per period. The volume of lmports shrinks to Q3Q4 units per period. The higher price implies that the consumer surplus decreases by area (P'PJC)while the producer surplus rises by area (PABP'). Area (FHCB) is the tariff revenue collected. This is the case because tariff revenues are the product of the tariff per unit times that number of units imported. The tariff per unit is P'P (= BF) and the volume of imports is Q3Q4 (= FH). Welfare analysis of a tariff A(producer surplus) = + area (1) A(consumer surplus) = - area (1+2+3+4) A(social welfare) = - area (2+3+4) But since area (3) represents the tariff revenues collected it cannot be considered a welfare loss as this money can be spent on schools and health care centres. Thus a tariff leads to a net welfare loss equal to areas (2) and (4). Nea (2) represents the resulting produdion inefficiency while area (4) represents the resulting consumption ineff iciency. Area (2) reflects production inefficiency because the cost of domestically producing Q1Q3 units (which is area Q1Q38A) is greater than what it would have cost the country to import these units at the world price P (area (Q1Q3FA). Figure 4,4 Effeds of a tariff ('small country'case) c ------------Sw' Q / period Area (4) reflects consumption inefficiency. Units Q4Q2 are now not consumed as a result of the tariff even though these units are valued by consumers more than what it would cost to import them. These units are worth area (Q4CJQ2), which is the sum of how much consumers would be willing to pay for each of these units. They would have cost only area (Q4Q2JH)to import. : Remember that despite the welfare toss a tariff may i I make sense. lt is a source of government revenues that i i may be impossible to replace. Also, the adjustment costs : i forthedisplacedworkersmaybeprohibitivelyhigh. i 101
Voluntary Voluntary export restraint is a form of protectionism that misleading since the request is really a demand and it is is a slightly different version of quotas. VERs are agreements made clear that unless the foreign government'voluntarily' between an exporting and an importing country limiting the complies, more restrictive protectionist barriers will be maximum amount of exports in a given period. The domestic imposed. Following the'end'of the IVIFA (the Multifiber (importing) government asks the foreign government to Arrangement), the US and the European Union had asked restrict the exports of the good; the term 'voluntary' is China to 'voluntarilv' restrain its exDorts of textiles. Subsidies Subsidies lower production costs of {irms and thus "@t"'"tult subsidies will decrease imports and may even lead to exports. The US cotton industry is the recipient of huge government subsidies and ranks number one in world exporls. The effects of a subsidy are illustrated in Fig.4.6. Initially assume free trade with the world price of the product at P The domestic industry will produce Q1 units per period whereas consumption will be at Q2 units per period leading to Q l Q2 units of imports. lf now a subsidy is granted to the domestic firms then their production (marginal) costs will decrease by the amount of the subsidy. Supply will increase, shifting downward by the amount of the subsidy to S'. The world price is not affected ('small country'case) but now at the world price P domestic firms will produce more. Domestic production at P is now at Q3 units per period so the volume of imports will shrink from Q1Q2 to Q3Q2 units. Domestic firms will earn P per unit p/us the subsidy which is the vertical distance HF between the two supply curves, i.e. the new averaoe revenue is Po. Regulatory Regulatory barriers may be technical, administrative, or any kind of'red tape'. . This is perhaps the most common form of protection. Regulatory barriers include product standards (to meet certain domestic requirements), sanltary standards (1o protect the domestic consumers), pol/utlon standards, etc. . Often these standards are set to protect domestic producers rather than domestic consumers by making it more difficult and thus costly for foreign firms to comply. . A most famous example is the one related to the city of Poitiers in France. In 1981 the French government ordered that all Japanese video imports were to be inspected and Figure 4.5 imports Effect of a subsidy to domestic producers on Q3 Q2 tMc M6\fS SD - "= daor subsidy per unit) subsidy per unit ----------- 5w qt p.y . Total revenues for the domestic industry have thus increased from area (0Q1JP) to area (0Q3FPp). Consumers enjoy the same amount at the same price but the government and thus, eventually, taxpayers are burdened by the cost of the subsidy which is equal to area (PHFPp). pass customs there. Poitiers is located inland, is far from ports and was staffed with only a few officers ordered to fully inspect each and every truck. The delays were huge and the volume of imports entering France per period was effectively reduced. Following complaints this absurd requirement was withdrawn. Another example is the banning by the EU of US hormone-treated beef in 1989. Even.though some studies show that a groMh hormone used in US cattle production is a 'complete carcinogen', Americans claim that the ban is nothing more than an attempt by the EU to protect its own cattle producers. 103
Page 1 and 2: International economics Free trade
Page 3: 100 Does it make sense? Economic ar
Page 7 and 8: The bilateral/regional . The region
Page 9 and 10: The terms strictly refer to offlc,a
Page 11 and 12: Exchange rate This has two effeds:
Page 13 and 14: Why do Factors that may affect inve
Page 15 and 16: How does a fixed It will be maintai
Page 17 and 18: Current account The current account
Page 19 and 20: Current account Remember a current
Page 21 and 22: Terms of trade: causes and effects

IB Econ Study Guide Internationals - Sunny Hills High School

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