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PROTECTIONISM

PROTECTIONISM. TARIFFS & OTHER MEASURES. Definition of Tariffs. What is tariffs?. Tax on imports which can be 1) Specific 2) Ad-Valorem. Resulting in…. Decrease in SS import Increase in equilibrium price of Imports Domestic goods get cheaper. Assuming market for cars

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PROTECTIONISM

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  1. PROTECTIONISM TARIFFS & OTHER MEASURES

  2. Definition of Tariffs What is tariffs? Tax on imports which can be 1) Specific 2) Ad-Valorem

  3. Resulting in… Decrease in SS import Increase in equilibrium price of Imports Domesticgoods get cheaper

  4. Assuming market for cars • World supply is at Sw and the price of cars is at P1. • At this price, consumption of cars is at Q4 but the no. of domestically produced cars are at Q1. To meet the demands of the people, Q1Q4 are imported. • A tariff of eq $5000 is applied. This increases the Sw upwards to Sw + tariffs. Hence, now the domestic production increases to Q2 and the domestic consumption decreases to Q3 after rationing process. Hence, only Q2Q3 are imported. • B+D is the overall loss in society welfare due to imposition of tariff. Price of Cars Ss P2 B C Sw + tariff P1 A D Sw Dd Quantity of Cars Q2 Q3 Q4 Q1

  5. Advantages: • Saves jobs and allows small companies to grow. • eg: In 1984, the USA consumers paid $42000 for each textile job that was preserved, which is higher than the normal income of textiler

  6. However, it is ineffective… • Dependant on PED/PES of domestically produced goods. • PED of imports • May result in retaliation of trade. Can be good as it forces the other country to open its economy Eg. the USA threatened to retaliate against Japans trade. Afraid to lose the trade, Japan agreed to abolish all tariffs on American cigarettes. American market shares were then tripled.

  7. PROTECTIONISM INFANT INDUSTRY to protect new industries that has potential comparitive advantage 2) PREVENTS DUMPING 3) PROTECT UNEMPLOYMENTto prevent unemployment caused by import penetration 4) CORRECT TRADE DEFICIT 5) PREVENT EXPLOITATION of labour, low wages and poor working environments

  8. WHAT IS DUMPING? Is the process of selling a product under its estimated value. This could cause the domestic producers to be forced to quit the market.

  9. China Soap Consumers will purchase China soap as it is cheaper and affordable. Singapore producers are unable to remain price competitive hence are forced out of the market. Cost of Production - $1. Sold in China for - $1.30 With the help of government, exports at $0.80 Singapore soap Cost of Production - $1 Sold in Singapore for > $1 to gain profit.

  10. However with Tariffs; To protect its domestic producers, Singapore implements a 50% tax on China Soap. China soap is then sold at $1.20 China Soap

  11. Trade Deficit: Occurs when total value of imported goods > exported goods which results in negative BOP. Eg. USA faced a trade deficit of US $47.8 billion as there was an increase in import of oil to meet demands but a decrease in export in shipment to Europe.

  12. Tariffs increase price of imported goods hence decreases the quantity demanded of imported goods. Hence, citizens money spent on imports decreases from EFG to FC. However C is paid to the government because of the tax imposed. Consumers switch to cheaper home brands hence domestic consumption increases hence promotes economic growth. However, this method is not feasible as it is only a short term answer as it does not tackle the root problems of trade deficit. Price of Cars Ss P2 Sw + tariff C D A B Sw P1 F G E Dd Quantity of cars Q4 Q1 Q2 Q3

  13. Administrative Barriers

  14. Administrative Barriers • Imposition of Strict Standards on ingredients of food • Deliberate excessive custom procedures

  15. TRADING BLOC

  16. Trade Bloc ‘Free trade agreement’ (FTA) between a subset of countries, designed tosignificantly reduce or remove trade barriers within member countries. When a trade bloc comprises neighbouring or geographically close countries, it is referred to as a ‘regional trade (or integration) agreement’

  17. Principle Characteristics Implies a reduction or elimination of barriers to trade Trade liberalisation is discriminatory Implies only to member countries of trade bloc

  18. Advantages • Allows trading partners to go deeper and faster in their liberalisation process, addressing modern trade barriers which are more varied, instead of tariffs and quotas

  19. Advantages • Ensures the credibility of the reform process undertaken by one or several members of the trade bloc. It can serve as a mechanism for policy determination of its members, hence contributing to reducing uncertainty and increasing credibility about political and economic developments

  20. Disadvantages • If a country is able to manufacture and produce goods at a price that is far cheaper than your local regional manufacturers and the government sets up a trading bloc with that country, then it becomes cheaper for retailers to import those goods from overseas. This leads to economic difficulties for the local manufacturersandproducers. This can increase the pressure on localsuppliers and can also affect unemployment rates negatively.

  21. Disadvantages • Affects regional businesses which are not part of the agreement due to higher tariffs and taxes on their exports thus causing an increase in price. This makes importing countries feel compelled to import from other suppliers.

  22. Example on britain • Britain exchanged Pounds Sterling with Europe for Euros • The trade agreement between European countries actually strengthened the value of the Euro • But has a disadvantage on countries outside the agreement

  23. VOLUNTARY EXPORTS RESTRAINTS

  24. A trade restriction (limit) by the exporting country on the companies that export their goods overseas. • Created as the country would prefer to impose their own restrictions before the importing country can impose any tariffs/quotas on the goods in the future. • To prevent the prices of the exports to increase after the tariff/quotas are imposed. • An exporting company can avoid VERs. It can build manufacturing plant in the country to which the exports would be directed. • It will not be bound by its country’s VER. What are VERs?

  25. Advantage(s)

  26. Importing Country • does not profit the most from such an agreement. exporting countries restrict amount of goods, importing countries receive less. Consumers have to pay a higher price for a good as domestic producers are less cost efficient. • The exporting country then can increase the price and gain more profits. Disadvantage(s)

  27. huge competition between the efficient Japan car industry and less efficient US car industry • US set strict quotas to limit the Japanese market share • Japan avoided the quota by imposing a VER, which eventually increased the prices of the goods to earn more profits • Caused many of the exporting countries’ companies to start a manufacturing plant in the US to avoid the VER Eg. Between Japan and USA

  28. Diagram/Analysis

  29. TRADE EMBARGO

  30. Definition of trade embargo A policy state initiates to prohibit trade with certain countries

  31. Examples • Australia enacted a trade embargo on Indonesia’s cattle in 2011 • Hong Kong enacted a trade embargo on the Philippines consumer goods in 2010 • US enacted a trade embargo on Cuba’s consumer goods, arms and money in 1960

  32. Evaluation

  33. Price of embargoed goods • Sn – Export supply to embargoed country from non-embargoing countries Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries P1 b c P0 a Dm Quantity of embargoed goods Q0 • Before the embargo, A’s import demand equals to the total export supply at point F at Fig 1. • Price is P0 and A imports Q0

  34. Price of embargoed goods • Sn – Export supply to embargoed country from non-embargoing countries Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries P1 b c P0 a Dm Quantity of embargoed goods Q0 • When countries decide to put an embargo on exports to A, part of the world export supply to A vanishes. • The export supply Se is removed by the embargo. The remaining export supply to A is only Sn.

  35. Price of embargoed goods • Sn – Export supply to embargoed country from non-embargoing countries Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries P1 b c P0 a Dm Quantity of embargoed goods Q0 • A experienced goods scarcity as a result causing prices to rise from P0 to P1, as the free trade equilibrium shifts from F to the embargo equilibrium at E. • The new scarcity costs A the area (b+c) • Countries imposing the embargo also lose area (a) indicating a loss of surplus on exports • Meanwhile, countries not participating in the embargo gain area (b) on extra sales to A at a higher price • The world together therefore loses area (a+c) • In the embargoing countries, the embargo lowers the price below P0 , thus slightly helping consumers while hurting producers. • In A, some import competing producers benefit from the embargo while others are negatively affected to a large extent.

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