International Trade &

Protectionism
By- Parnika Agarwal & Lokesh Chaudhary
Why international
trade?
Hecksher-Ohlin Theory
Theory developed by : Swedish economist Bertil Ohlin
based on his teacher’s work - Eli Filip Hecksher

The countries export what they are best at - capital intensive

countries export capital intensive products. Given in
textbook as ‘factor endowment’.
 25.1 : Advantages
Absolute
If a country can produce more
of the product with the same
quantity of resources than
other countries.
If countries specialise in these
products, outputs rise as per
opportunity cost ratios*.
Comparative
If a country chooses to
produce a product it is more
efficient at, compared to the
other country.
Specialising through this
helps countries focus what
they are best at, and
increases output.
Comparative advantage

Comparing the two

advantages
 Rising competition, hence low
Efficient resource allocation
prices and costs with quality
by allowing specialisation.
output.

Free trade

Higher output, hence firms benefit Consumers have a varied

from economies of scale. choice, and firms have a varied
choice of raw materials.
 Trading possibility curve

how an economy
can benefit from
specialising & trading
 Terms of trade
Terms of trade measure the relationship
between a country's exports and imports.
Calculated as the ratio of export prices to import
prices, weighted by product importance. An
increase in the index is favorable, indicating
improved purchasing power for imports.
 Causes & impact
Causes of changes
shifts in demand and supply
price levels
exchange rates.
The Prebisch-Singer hypothesis
suggests primary product
specialization may lead to
declining terms of trade over
time.
Impact of changes
The impact of favorable
movements depends on their
causes.
Rising export prices due to
increased demand are generally
positive, while cost-driven
increases may have negative
consequences.
 Theory of National Competitive Advantage:
Porter’s Diamond

Domestic demand conditions Factor endowments

Related & supporting Firm Strategy, Structure, and

industries Rivalry
 Protectionism: protecting
domestic producers from
foreign competition

Tariffs Import Export Embargoes ''Red Tape''

Taxes on imports to
discourage them or
Quotas subsidies Complete ban on
Imposing excessive
paperwork or high
gain revenue. Benefits Limits on imports to Financial support to imports of a product or
product standards to
domstic producers but restrict supply & exporters and domestic trade with a country.
discourage imports, but
harms domestic increase prices, which is firms competing Reasons are banning
reduces consumer
consumers. disadvantageous to with imports. This harmful products, or
choice.
consumers. reduces costs, reduces political disputes.
price, increases price.
 Arguments for protection
Protect infant industries Protect declining industries

Protect strategic industries To prevent dumping

To improve terms of trade To improve balance of

payments

To provide protection from

cheap labor
 Arguments against protection

Reduces international
Prevents specialisation competition

Reduces choices to
consumers Reduces size of markets

Reduces choice of raw Trade war - tariffs pushing up

materials and capital goods. prices
MERCANTILISM THEORY
Related case study
- Sugar act of 1974
Context: French and Indian war fought
between Great Britain and France over
control of USA, hence Britain.

Taxation: required to pay a tax of six pence

per gallon on the importation of foreign
molasses. Due to tax evasion and
corruption not as effective.

Solution: Reduced tax from six to 3 pence

per gallon, and enforced strict controls.

Result: reduced American market by

stopping trade with the French West
Indies, Canary Islands, Haiti, and more. Set
the tone for revolution.
Thank you
very much!