Definition: The protection

of home industries from foreign competition by the imposition of trade barriers on foreign products by the govt.
Effects of Tariff:
1. Consumers reduce consumption of imports a) Switching to domestically produced import substitutes b) Consumer surplus decreases Domestic producers expand production a) Revenues previously earned by foreign producers now go to domestic producers b) Producers’ surplus increases Gains in govt. revenue a) Tariffs = tax revenue b) Overall Deadweight Loss METHODS OF TRADE RESTRICTION

MAY LEAD TO: • Misallocation of resources • Retaliation -> Reduction in world trade, employment and income -> Worldwide Depression • Increase in price and Cost Of Living • Smaller variety of goods available in the domestic market • Problem of monopoly profits • Aid Replacement

Economic Reasons: • Protection of Infant Industries – New
industries need to be protected from competition in their initial stages. Time is needed to develop skilled management, reputation, reap Economics Of Scale etc. (Argument stands only if those infant industries with potential Comparative Advantage and growth are protected) • Protect declining Industries – Protection is needed to allow ‘sunset’ industries to decline slowly and prevent the precipitation of massive regional unemployment or restructure the firm

POINTS AGAINST

POINTS SUPPORTING

2.

• Prevent Unfair Trade Practices (Dumping) –
Prevent long term exploitation of the consumer and protect local firms from losing their competitiveness • Correct a temporary Adverse BOP – Deficits caused by high levels of imports may run down foreign reserves • Diversify Economy – Govt. protection helps to reduce risks of overdependence on foreign trade and on 1 domestic industry. (Argument stands only if economic diversification leads to expected gains in the long run

Anti-Trade Policies

3.

(Protectionism)

• • • • • • • • • •

Preferential Treatment Product Standard Regulation Procurement policies Tariffs - a tax on imports; government gain Import Quotas - a limit to how many imports allowed; gain to produces as higher profits Import Licensing - governments grants importers the license to import goods. Foreign Exchange Control - limits on dealing of foreign currency, less imports possible Embargo - Total ban on foreign imports Export Subsidies - distort market forces as supply will be greater , more volume of exports Voluntary Export Restraint – where 2 countries make an agreement to limit the volume of their exports to one another over an agreed period of time

Non-Economic Reasons: • Protect Key industries • Foster closer political ties • Promote social policies • Pursue Political objectives

Name: See Sher Lyn (18) Class: 1105