In this video we’ll take a look at the meaning of the word protectionism in the context of
international trade.
Protectionism includes the actions a government takes to restrain trade between countries
usually with the intent to protect local producers, businesses and workers.
The several types we will examine include tariffs, import duties and quotas, export
subsidies, embargoes, voluntary export restraints and excessive administrative burdens.
For those highlighted in yellow, there will be an associated graph.
A tariff is a tax (duty) on a good or service that raises its price.
Its purpose is to reduce domestic quantity demanded and increase domestic supply.
To understand how it works, let’s check out the diagram.
Follow me through the explanation.
I’ll use green to represent the domestic market.
Orange to represent world supply before the tariff.
I’ll then use purple to indicate changes after the tariff.
Firstly, I’ll plot the domestic market using a diagram you should already be familiar with.
I’ll include domestic supply and demand with equilibrium price P* and equilibrium
quantity Q*.
Let’s now introduce the world supply which is assumed to be perfectly elastic at a lower
than domestic equilibrium price.
Our world suppliers can provide this good or service at a price of Pw.
Given this new information we can see that domestic suppliers supply the market until
quantity Q1 is reached.
The quantity of Q1 to Q2 is provided by foreign firms.
Suppose the government now decides to impose a tariff on imports.
That will increase the price of imports by the full value of the tariff.
This results in our world supply curve shifting upwards to S world plus tariff.
Our new price is Pw+t.
Due to the higher market price, domestic supply now extends to Q3 and foreign supply reduces
to the difference between Q3 and Q4.
The area represented by the shaded blue rectangle is the tariff revenue to the government, whereas
the two red triangles represent the deadweight loss of imposing the tariff.
A quota is a restriction on the amount (supply) of a good or service that can be sold into
a country.
An import duty is a tax on goods and services beyond a specific quantity.
We’ll examine the diagram for the quota next.
I’ll start again with our previous diagram and make a few changes.
Keeping the world supply in we can see that domestic supply will account for 250 units
and world supply will account for an additional 650 units, bringing total quantity supplied
to 900.
Suppose the government introduces a quota of 200 units.
This now means that domestic suppliers will supply 250 units, and world producers will
supply 200 units.
Additionally, since there is excess demand at this point, domestic producers will be
incentivised to supply the market and continue to supply the market until equilibrium price
Pq is achieved.
As you can see, beyond P1, our supply curve has shifted rightwards by the amount of the
quota.
The overall quantity traded in the market post quota is 650 units.
I’ll now mark in red the quantity supplied domestically and mark in blue the quantity
supplied by foreign firms.
Export subsidies are financial support provided by a government to firms who export products
overseas.
The intent of the export subsidy is to improve the competitiveness of the exporting firm’s
products.
It could be in various forms, such as a direct subsidy for export performance, assistance
with marketing costs, internal transport subsidies to reduce export costs and subsidies on incorporated
products.
Embargoes are the complete ban on trade with a specific country, usually imposed for political
reasons.
The United States has a near total embargo on trade with North Korea.
If anyone can figure out what that 0.1 represents, I’d be happy to find out.
Voluntary export restraints, or VERs, are a government imposed limit on the quantity
of some category of goods that can be exported to a specified country during a specified
period of time.
Quoting Daniel K. Benjamin in his article on VOLUNTARY EXPORT RESTRAINTS ON AUTOMOBILES,
he writes:
“In May 1981, with the American auto industry mired in recession, Japanese car makers agreed
to limit exports of passenger cars to the United States.
This "voluntary export restraint" (VER) program, initially supported by the Reagan administration,
allowed only 1.68 million Japanese cars into the U.S. each year.
The cap was raised to 1.85 million cars in 1984, and to 2.30 million in 1985, before
the program was terminated in 1994.”
The author goes into great detail as to the effects of this VER and it is definitely worth
a read if you have some time.
I’ll include the link in the video notes.
Excessive administrative burdens include the introduction of additional layers of administration
and ‘red tape’ that must be addressed before goods or services can be sold into
a country.
The aim is to increase regulatory costs and discourage foreign firms.
It is difficult to prove whereas the others are more obvious.
That wraps up this video on the different types of protectionism.
Be sure to review the key graphs on tariffs and quotas.
If you have any questions, comments or can explain what the US sold to North Korea, please
leave a message below.
You can also email me at enhancetuition@gmail.com or visit my website.
That’s us done for now and I will see you in the next one!