20.1 Protectionism: An Indirect Subsidy from Consumers to Producers
3 min read•june 25, 2024
is a hot topic in international trade. Governments use various tools like tariffs, quotas, and non- barriers to shield domestic industries from foreign competition. These policies aim to boost local production and jobs.
But protectionism isn't all rosy. It can lead to higher prices for consumers and reduced choices in the market. It also impacts global trade dynamics, affecting both domestic and foreign producers. Understanding these effects is key to grasping the complexities of international economics.
Protectionism and Its Effects on Markets
Protectionism, Tariffs, Import Quotas, Non-Tariff Barriers
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- Protectionism government policies restricting international trade to protect domestic industries from foreign competition intended to promote domestic production, employment, economic growth
- Tariffs taxes imposed on imported goods
- Ad valorem tariffs calculated as percentage of value of imported good (10% tariff on 10 tax)
- Specific tariffs fixed charge for each unit of imported good ($10 per ton of steel)
- Import quotas quantitative restrictions on amount of good that can be imported typically set below level of imports (limit of 10,000 cars per year)
- Non-tariff barriers regulations or policies restricting trade without direct taxes
- Product standards (safety requirements), licensing requirements (import licenses), administrative procedures (customs paperwork)
Impact on Domestic and International Markets
- Tariffs
- Increase price of imported goods in domestic market shifting supply curve for imported good left, raising equilibrium price, reducing equilibrium quantity
- Domestic producers sell at higher price, increase output
- Domestic consumers face higher prices, reduce consumption (less affordable imported goods)
- Foreign producers face reduced demand for exports
- Import quotas
- Restrict quantity of imports, creating scarcity in domestic market shifting supply curve for imported good left, raising equilibrium price
- Domestic producers increase price and output
- Domestic consumers face higher prices, reduce consumption (limited availability of imported goods)
- Foreign producers face quantitative limit on exports
- Non-tariff barriers
- Increase costs or difficulties for foreign producers to access domestic market can shift supply curve for imported good left, raising equilibrium price, reducing equilibrium quantity
- Domestic producers may benefit from reduced competition, higher prices
- Domestic consumers may face higher prices, reduced choices (fewer imported options)
Consumer and Producer Surplus, Deadweight Loss
- Tariffs redistribute surplus
- decreases due to higher prices
- some of lost consumer surplus not transferred to anyone
- increases as domestic producers sell at higher prices
- Government revenue increases from tariff revenue collected
- Tariff revenue = Tariff rate × Quantity of imports after tariff
- decreases due to higher prices
- Calculating changes in consumer and producer surplus
- Consumer surplus change =
- initial price, price after tariff, initial quantity, quantity after tariff
- Producer surplus change =
- initial price, price after tariff, initial quantity, quantity after tariff
- Deadweight loss =
- Represents net loss in total surplus (consumer + producer surplus)
- Consumer surplus change =
- Foreign producers experience decrease in producer surplus due to reduced exports, lower prices in their domestic market (less revenue from international sales)
Key Terms to Review (18)
Comparative Advantage: Comparative advantage is an economic principle that describes the ability of an individual, business, or country to produce a particular good or service at a lower opportunity cost compared to another producer. It forms the basis for mutually beneficial trade between different entities.
Consumer Surplus: Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay. It represents the additional benefit or satisfaction consumers receive beyond what they have to pay, essentially the economic gain from a transaction from the consumer's perspective.
Deadweight Loss: Deadweight loss refers to the economic inefficiency that occurs when the socially optimal quantity of a good or service is not produced or consumed due to market failures, such as government intervention or the presence of monopolies. It represents the loss in total surplus (the sum of consumer and producer surplus) that results from a deviation from the optimal market equilibrium.
Economic Nationalism: Economic nationalism is a policy approach that prioritizes domestic economic interests and the protection of a country's industries and markets from foreign competition. It emphasizes self-sufficiency, import restrictions, and the promotion of domestic production over international trade and globalization.
Free Trade: Free trade is an economic policy that allows countries to import and export goods without government interference, such as tariffs or quotas. It aims to promote the unrestricted flow of goods and services between countries, with the goal of increasing economic efficiency and growth.
Globalization: Globalization is the process of increased interconnectedness and integration of economies, societies, and cultures across the world. It involves the expansion of international trade, investment, and the exchange of ideas, technologies, and people between countries and regions.
Import Substitution: Import substitution is an economic policy that aims to replace foreign imports with domestic production. It involves imposing tariffs, quotas, or other trade barriers to protect local industries and encourage the development of domestic manufacturing capabilities.
Isolationism: Isolationism is a policy of limiting or eliminating a country's involvement in the political and economic affairs of other countries, often through the implementation of trade barriers and the restriction of foreign relations. It is a strategy that aims to insulate a nation from external influences and dependencies.
Mercantilism: Mercantilism is an economic theory and practice that emphasizes the accumulation of wealth, usually in the form of gold or silver, by a nation through a positive balance of trade with other nations. It was a dominant economic philosophy in Europe from the 16th to the 18th century.
NAFTA: NAFTA, the North American Free Trade Agreement, is a trilateral trade agreement between the United States, Canada, and Mexico that aimed to eliminate most tariffs and barriers to trade and investment among the three countries. It has been a significant factor in shaping the economic systems and trade policies of these nations.
Producer Surplus: Producer surplus is the difference between the amount a producer is willing to sell a good for and the amount they actually receive for it in the market. It represents the economic benefit that producers gain from selling their goods at a price that is higher than the minimum price they would be willing to accept.
Protectionism: Protectionism refers to government policies and actions designed to restrict or limit international trade in order to protect domestic industries and jobs from foreign competition. It is a trade strategy that aims to shield a country's economy from the effects of foreign competition.
Quota: A quota is a government-imposed limit on the quantity or value of a good that can be imported or exported during a specific time period. It is a form of trade restriction used to protect domestic industries from foreign competition.
Subsidy: A subsidy is a form of financial assistance or support provided by the government or other entities to individuals, businesses, or industries, with the aim of promoting certain economic activities, reducing costs, or influencing market prices. Subsidies can take various forms, such as direct payments, tax credits, or preferential treatment, and are often used as a policy tool to achieve specific economic or social objectives.
Tariff: A tariff is a tax or duty imposed by a government on imported goods or services. Tariffs are a key policy tool used in the context of trade and protectionism, as they can be leveraged to influence the flow of goods and services across international borders.
Trade Deficit: A trade deficit occurs when a country's imports of goods and services exceed its exports, meaning the country is spending more on foreign products than it is earning from selling its own products abroad. This imbalance in trade flows is a key consideration in the topics of protectionism and the tradeoffs of trade policy.
Trade Liberalization: Trade liberalization refers to the reduction or elimination of barriers to international trade, such as tariffs, quotas, and other protectionist measures. This process aims to promote the free flow of goods, services, and capital across national borders, fostering greater economic integration and interdependence among countries.
World Trade Organization: The World Trade Organization (WTO) is the global international organization that regulates and facilitates trade between nations. It serves as a platform for negotiating trade agreements and resolving trade disputes, with the goal of promoting open and fair trade practices among its member countries.