(a) Explain three types of protectionism that a government might adopt in the context of international trade. (b) Evaluate the extent to which protectionism may be justified in international trade.

Definitions:

Protectionism – A policy introduced by the government which inhibits international trade such as tariffs, subsidies, and quotas.

Tariffs

A tariff is a tax on imports, which can either be specific (so much per unit of sale) or ad valorem (a percentage of the price of the product). Tariffs reduce supply and raise the price of imports. This gives domestic equivalents a comparative advantage. As such, tariffs are distorting the market forces and may prevent consumers from gaining the benefit of all the advantages of international specialisation and trade. The impact of a tariff is shown in Figure 1 below.

The tariff has the effect of shifting the world supply curve vertically upwards by the amount of the tariff. The level of imports will fall from QaQd to QbQc. The government will also raise revenue, shown by the blue shaded area. The level of domestic production will increase from 0Qa to 0Qb.

Quotas

Quotas have the effect of restricting the maximum amount of imports allowed into an economy. Once again, they reduce the amount of imports entering an economy and increase the equilibrium price within the market. The government receives no revenue from a quota, as it does with a tariff, unless it can set up a system of licences.

Export subsidies

Export subsidies allow exporters to supply the market with more product than the natural equilibrium would have allowed. Foreign consumers will enjoy increased economic welfare as the price of their purchases fall. Domestic employees might enjoy more wages and job security. But taxpayers are footing the bill for this. Domestic firms might divert trade into exports and ignore the home market. This could lead to increases in domestic prices.

The impact of a subsidy is shown in Figure 2. The supply curve is shifted vertically downwards by the amount of the subsidy and this leads to a lower equilibrium price and a higher quantity being traded.

• Tariffs are taxes that a government can put on a product of a foreign company trying to export to said country. They generate government revenue. They rise the price of cheaper imported goods to allow domestic producers to compete with international producers. However, they also let inefficient producers back into the market and take away the product form consumers that cannot afford it at a higher price.
• Quotas limit the amount of a product that can be imported. This means that the supply will decrease.

Finally, for evaluation we must evaluate the pros and cons of the various types of protectionism. Moreover, discuss in which situations (infant industry and dumping) in which protectionism is acceptable.

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