Methods of Protection

Sonam Sangwan
Assistant professor, Economics
GCW Bawani Khera
 Trade Barriers

International trade is generally characterized by the existence

of various trade barriers. Trade barriers refer to the
government policies and measures which obstruct the free
flow of goods and services across national borders.

The main objectives of imposing trade barriers are:

•To protect domestic industries from foreign competition.
•To guard against dumping
•To promote indigenous research and development
•To conserve foreign exchange resources of the country
•To make the Balance of Payments position more favourable
•To curb conspicuous consumption and mobilise revenue for the
government
 Types of Trade Barriers

Trade Barriers are broadly divided into two groups:

Tariff Barriers
Non-tariff Barriers
 Tariff Barriers

Tariffs refer to the duties or taxes imposed on the export and import
of any commodity as it crosses national border.

Tariff is a very important instrument of trade protection, generally

regarded as less restrictive than other methods of protection like
quantitative restrictions. Therefore organisations like WTO
generally prefer tariff to Non-tariff barriers.
 Classification of Tariff Barriers

On the basis of the origin and destination of the goods

crossing the national boundary, tariffs may be classified
into the following three categories:
•Export duties
•Import duties
•Transit duties

Export Duties: A tax imposed on a commodity originating from the duty

levying country destined for some other country.
Import duties: A tax imposed on a commodity originating abroad and destined
for the duty levying country.
Transit duties: A tax imposed on a commodity crossing the national frontier
originating from and destined for other countries.
 Classification of Tariff Barriers

On the basis of the quantification, tariffs may be

classified into the following three categories:
•Ad-valorem duties
•Specific duties
•Compound duties

Ad-valorem Duties: duties are levied as a fixed percentage of the value of the
commodity imported/exported
Specific duties: duties are levied as a flat sum per physical unit of the
commodity imported or exported.
compound duties: mixture of ad-valorem and specific duties.
How Tariff works? DD₁= Domestic Demand curve
SS₁= Domestic Supply curve
In absence of trade: eq. price is P₂ and
domestic DD and SS being Q₄
We assume, Foreign SS curve is perfectly
elastic at price P.
Under free trade: Supply position is
Price represented by PF
Under free trade, at price P:
S₁
D Domestic demand: Q
Domestic supply: Q₂
Imports: Q₂Q
N
P₂ Now ,assume that govt. imposes a tariff of
A F₁ PP₁ per unit of import, therefore price rises
P₁
from P to P₁. Now at P₁:
P F Domestic demand: Q₁
E B C Domestic supply: Q₃
S D₁
Imports: Q₃Q₁

Q₂ Q₃ Q₄ Q₁ Q

Quantity
 Effects of Tariff Consumption effect: reduction in domestic
consumption (QQ₁ or CF)
Production effect: expansion in domestic
production (Q₂Q₃ or EB)
Trade effect: the decline in imports (BE+CF)
Revenue effect: revenue collected by govt.
by tariff (ABCF₁)
Consumer surplus (measured by the area
Price
under the dd curve and above the going
S₁ price):
D Under free trade, CS: DFP
After tariff, CS: DP₁F₁
N Loss in CS: PFF₁P₁ (reduction in CS)
P₂ Producer Surplus (measured by the area
A F₁
P₁ below the price and above the SS curve):
F Under Free Trade, PS: PSE
P
E B C After tariff, PS: P₁AES
S D₁ Gain in PS: PP₁AE
Net loss (Deadweight loss) : area ABE + area
O
Q₂ Q₃ Q₄ Q₁ Q CFF₁ (cost of tariff)

Quantity
 A tariff would likely to improve the terms
Terms of Trade Effect of trade of a tariff-imposing country.
OH- offer curve of Home country
H exporting X-goods and importing Y-goods.
T OF: offer curve of foreign country
T₁ F exporting Y-goods and importing X-goods
At Free trade eq:
Y
TOT: qty of exports/qty of imports or
Y Goods

OX/OY
H₁ Now suppose, home country imposes
tariff on its imports → shifts offer curve to
Y₁ OH₁ → OT₁ (OX₁/OY₁) is new eq. TOT
E₁ OT₁ is more favourable than OT for the
home country as now the home country
is getting a large quantity of imports for a
given quantity of its exports as
OX₁/OY₁ < OX/OY.

O X₁ X₂ X

X Goods
 Income distribution Exportable good-labor intensive
Importable good-capital intensive
effect At free trade: production pt. is at P
Production of After tariff: price of importable rise
Capital importable
O’ → producers start increasing
production of import goods and
decreasing production of exports →
P shifts to P’.
Production method in both
industries become labor-intensive
P because when production of
importable ↑ which is cap-
intensive, more capital is used→
relative price of capital is bid up.
P’
Producers try to substitute labor for
capital → production methods
become more labor intensive.
O This phenomenon is known as
Production of Labor
Stopler-Samuelson Theorem
exportable
 Tariff and Balance of Payment

A tariff will usually have a positive effect on a country’s Balance of

Trade.

Tariff → imports ↓ initially → balance of trade improve. At the same

time, national income increases → negative effect on BOT

Much now depends on behaviour of trading partners. If repercussions

are small and no retaliation occur→ trade balance improve

But If imports ↑ due to increased national income and if foreign

repercussions are great → temporary improvement in BOT may be
destroyed.
 Tariff and National Income

Tariff → switch demand from international goods to home goods.

With an export schedule X and Import schedule M, national income is
Y. because of tariff, imports reduce from M to M’ and national income
increases from Y to Y’.

M’
Exports/Imports

Y Y’ National
Income
 Tariff and Employment
As national income increases from Y to Y’ due to tariff,
unemployment decreases. The use of tariff for deceasing
unemployment is called Beggar-thy- Neighbour policy. but this is
feasible only if there is no retaliation on the part of the trading
partner.
M

M’
Exports/Imports

Y Y’ National
Income
Thank you..