Trade Protectionism
Trade Protectionism
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Involves government intervention in international trade through the imposition of trade restrictions (barriers) to prevent the free entry of imports to a country or to protect the domestic economy from foreign competition
Tariff
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Taxes on imported goods and services
2 Functions of Tariff
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Protect domestic industry from foreign competition (protective tariff)
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Raise revenue for the government (revenue tariff)
Effect on Market Outcome
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After the tariff is imposed, the world price (Pw) has increased to world price + tariff (Pw + t). This caused the domestic quantity supplied to increase from Q1 to Q2, and the quantity demanded to decrease from Q4 to Q3. The quantity of imports has decreased from (Q4 - Q1) into (Q3 - Q2). The shaded area of (Pw+t - Pw) * (Q2 - Q3) will become the government revenue.
Effect on Different Stakeholders
Quota
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Legal limit to the quantity of a good that can be imported over a particular time period
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The difference between quota and tariff is that quota doesn’t create a revenue
Effect on Market outcome
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Initially the quantity of import is equal to the excess demand (Q4 - Q1) under free trade. However, the government wants to restrict the quantity of imports into (Q3 - Q2). Therefore, this restriction rightshifts the initial supply curve Sd to the new supply curve Sdq (the reason for a right shift is because once the government imported a quota, it caused a shortage in the domestic market. When a shortage appears, it puts an upward pressure on price. Once the price has risen, it signals the domestic producer to produce more, thus increasing the supply and shifting the supply curve rightward.)
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Then, this rightward shift of the supply curve determines the new domestic equilibrium, which is the intersection of the supply curve Sdq and demand curve Dd. This results in a decrease in import from (Q4 - Q1) to (Q3 - Q2), with an increase in price from Pw to Pq.
Effect on different stakeholders
Arguments on FOR or AGAINST trade protectionism
