Chapter 25 · Macroeconomics
Protectionism
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Key Definitions
- Protectionism
- Government measures that restrict or discourage international trade.
- Tariff
- A tax on imports, applied either as a specific or an ad valorem tariff.
- Quota
- A physical limit on the quantity of a good that may be imported.
- Dumping
- Selling a product abroad below its marginal cost to gain market power.
Policies
Tariffs
- Raise the home price so domestic supply expands and domestic demand falls.
- Specific tariffs are a fixed sum per unit; ad valorem tariffs are a percentage of value.
- Tariff revenue is collected by the government.
- The move to a tariff is inefficient because the loss of consumer surplus exceeds the gains to producers and the government.
Quotas
- Directly cap the quantity imported.
- Generate no government revenue; the gap is captured by importers.
- Hard to set the right level and costly to monitor.
Subsidies
- Lower the domestic cost of production and protect jobs and technical assistance.
- Export subsidies work well where foreign demand is price elastic.
- Limited by government finances.
Foreign exchange controls
- Restrict the supply of foreign currency available to importers.
- Reduce the quantity of imports and hence the standard of living.
Embargoes
- Total bans on trade, often imposed for political reasons.
- Example: Singapore's ban on the export of military goods to Russia.
Reasons for protection
Infant industries
- Young industries are small, without economies of scale and with limited finance.
- Imperfect information makes it hard to know which industries will succeed.
- There is a risk of over-reliance and wasted resources.
Anti-dumping
- Protecting against sale below marginal cost intended to drive out rivals and later raise price.
- Predatory dumping is hard to prove in practice.
Diagram Notes
The world price is $2 and a tariff raises the import price to $4. Domestic demand falls from 60 to 40 units and domestic supply rises from 10 to 30 units. The government gains $20 in tariff revenue. Consumer surplus falls, domestic producer surplus rises, and because the loss of consumer surplus exceeds the combined gain to producers and government, the tariff creates a deadweight loss.
A quota caps imports at a fixed quantity, holding the home price above the world price. Unlike a tariff, no revenue accrues to the government; the price gap is captured as profits by importing firms.
Evaluation Points
- Tariffs raise revenue but are inefficient; quotas avoid revenue but create importer profits.
- Infant-industry protection is most justified when the industry will become internationally competitive within a clear horizon.
- Anti-dumping duties require evidence that proves genuine predatory pricing rather than normal price competition.