3-Protectionism PDF

7/17/2019 3 Protectionism
Application:
9
International Trade
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The Effects of a Tariff
• A tariff is a tax on goods produced abroad and

sold domestically.
• Tariffs raise the price of imported goods above
the world price by the amount of the tariff.
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Copyright © 2004 South-Western/Thomson Learning
Figure 6 The Effects of a Tariff
Price
of Steel
Domestic
supply
Equilibrium
without trade
Price
with tariff Tariff

Price World
without tariff Imports price
Domestic
with tariff
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
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3/23
Price
of Steel
Consumer surplus
before tariff Domestic
supply
Producer
surplus Equilibrium
before tariff without trade
Price World
without tariff price
Domestic
demand
S D
0 Q Q Quantity
of Steel
Imports
4/23
Price
of Steel
Consumer surplus
with tariff Domestic
supply
A
Equilibrium
without trade
B
Price
with tariff Tariff

Price World
Domestic
with tariff
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
5/23
Price
of Steel
Domestic
supply
Producer
surplus Equilibrium
after tariff without trade
Price
with tariff C Tariff

Price World
without tariff G Imports price
Domestic
with tariff
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
6/23
Price
of Steel
Domestic
supply
Tariff Revenue
Price
with tariff E Tariff

Price World
Domestic
with tariff
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
7/23
Price
of Steel
Domestic
supply
A
Deadweight Loss
B
Price
with tariff C D E F Tariff

Price World
without tariff G Imports price
Domestic
with tariff
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
8/23
• A tariff reduces the quantity of imports and

moves the domestic market closer to its
equilibrium without trade.
• With a tariff, total surplus in the market
decreases by an amount referred to as a
deadweight loss.
The Effects of an Import Quota
• An import quota is a limit on the quantity of a

good that can be produced abroad and sold
domestically.
Figure 7 The Effects of an Import Quota
Price
of Steel
Domestic
supply
Equilibrium
without trade Domestic

Quota
supply
+
Import supply
Isolandian
price with
Equilibrium
quota
with quota
Price
World World
without =
price Imports price
quota Domestic
with quota
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
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12/23
• Because the quota raises the domestic price

above the world price, domestic buyers of the
good are worse off, and domestic sellers of the
good are better off.
• License holders are better off because they
make a profit from buying at the world price
and selling at the higher domestic price.
7/17/2019
Figure 7 The Effects of an Import Quota 3 Protectionism
Price
of Steel
Domestic
supply
Equilibrium
without trade Domestic

Quota
supply
A
+
Import supply
Isolandian
price with B
Equilibrium
quota
with quota
Price C D E' E" F
World World
without =
price G Imports price
quota Domestic
with quota
demand
S S D D
0 Q Q Q Q Quantity
of Steel
Imports
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• With a quota, total surplus in the market

decreases by an amount referred to as a
deadweight loss.
• The quota can potentially cause an even larger
deadweight loss, if a mechanism such as
lobbying is employed to allocate the import
licenses.
The Lessons for Trade Policy
• If government sells import licenses for full

value, revenue equals that of an equivalent
tariff and the results of tariffs and quotas are
identical.
• Both tariffs and import quotas . . .

• raise domestic prices.
• reduce the welfare of domestic consumers.
• increase the welfare of domestic producers.
• cause deadweight losses.
• Other Benefits of International Trade

• Increased variety of goods
• Lower costs through economies of scale
• Increased competition
• Enhanced flow of ideas
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19/23
THE ARGUMENTS FOR
RESTRICTING TRADE
• Jobs
• National Security
• Infant Industry
• Unfair Competition
• Protection-as-a-Bargaining Chip

20/23
CASE STUDY: Trade Agreements and the

World Trade Organization
• Unilateral: when a country removes its trade

restrictions on its own.
• Multilateral: a country reduces its trade
restrictions while other countries do the same.

21/23

• NAFTA
• The North American Free Trade Agreement
(NAFTA) is an example of a multilateral trade
agreement.
• In 1993, NAFTA lowered the trade barriers among
the United States, Mexico, and Canada.

22/23

• GATT
• The General Agreement on Tariffs and Trade
(GATT) refers to a continuing series of negotiations
among many of the world’s countries with a goal of

promoting free trade.
• GATT has successfully reduced the average tariff
among member countries from about 40 percent
after WWII to about 5 percent today.

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7/17/2019 3 Protectionism

The Effects of a Tariff

• A tariff is a tax on goods produced abroad and

Figure 6 The Effects of a Tariff

with tariff Tariff

Figure 6 The Effects of a Tariff

Figure 6 The Effects of a Tariff

with tariff Tariff

Figure 6 The Effects of a Tariff

with tariff C Tariff

with tariff E Tariff

with tariff C D E F Tariff

The Effects of a Tariff

The Effects of a Tariff

• A tariff reduces the quantity of imports and

The Effects of an Import Quota

• An import quota is a limit on the quantity of a

without trade Domestic

The Effects of an Import Quota

• Because the quota raises the domestic price

without trade Domestic

The Effects of an Import Quota

The Effects of an Import Quota

• With a quota, total surplus in the market

The Lessons for Trade Policy

• If government sells import licenses for full

The Lessons for Trade Policy

• Both tariffs and import quotas . . .

The Lessons for Trade Policy

• Other Benefits of International Trade

http://slidepdf.com/reader/full/3-protectionism Copyright © 2004 South-Western/Thomson Learning

http://slidepdf.com/reader/full/3-protectionism Copyright © 2004 South-Western/Thomson Learning

CASE STUDY: Trade Agreements and the

• Unilateral: when a country removes its trade

http://slidepdf.com/reader/full/3-protectionism Copyright © 2004 South-Western/Thomson Learning

CASE STUDY: Trade Agreements and the

http://slidepdf.com/reader/full/3-protectionism Copyright © 2004 South-Western/Thomson Learning

CASE STUDY: Trade Agreements and the

among many of the world’s countries with a goal of

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