Nicole Wallenburg
Economics
Mr. Parkin
Oct 26, 2011
Economics – Lecture #12
International Trade Restrictions
Governments intervene in international trade to protect domestic producers from
competition.
Governments use four sets of tools:
Tariffs
o A tax on a good that is imposed by the importing country when an
imported good crosses its international boundary.
o Effects
Raises the price, more is supplied, less is imported
o Winners, Losers, an Social Loss from a Tariff
Canadian consumers lose because higher price and smaller
quantity bought
Canadian producers gain because they can sell them at a higher
price so they produce more
Canadian consumers lose more than Canadian producers gain
Society loses: a deadweight loss arises.
o Society Loses: A Deadweight Loss
Some of the loss of consumer surplus is transferred to producers
and some is transferred to the government as tariff revenue.
But the increase in production costs and the loss from decreased
imports is a social loss.
No Tariff Tariff
o15
(a) Free trade
(a) Free trade
Deadweight
free trade
loss from tariff
World price
World 7
C D E
Imports
Tariff
with free
Producer
with tariff
trade
World
surplus
expands
Quantity
(millions of shirts per year
Quantity [millions of Tshirts per year]
(b) Market with tariff
Scan quota
Price with
quota
World
World
Imports
Quota
ports
with quota
with free
8.0
2.0
3.5
4.5
6.0
Quantity (millions of Tshirts per year)
Quantity Imillions of Tshirts per year
(b) Market with import quota
15 (a) Free trade (a) Free trade Deadweight free trade loss from tariff World price World 7 C D E Imports Tariff with free Producer with tariff trade World surplus expands Quantity (millions of shirts per year Quantity [millions of Tshirts per year] (b) Market with tariff Scan quota Price with quota World World Imports Quota ports with quota with free 8.0 2.0 3.5 4.5 6.0 Quantity (millions of Tshirts per year) Quantity Imillions of Tshirts per year (b) Market with import quota Nicole Wallenburg
Economics
Mr. Parkin
Oct 26, 2011
No Tariff Tariff – CS shrinks – PS expands
o
Import quotas
o A restriction that limits the maximum quantity of a good that may be
imported in a given period.
Ex: food products such as meat, eggs, and dairy products and
manufactures such as steel
o Effects:
Raises the price, quantity supplied increases, imports decrease
o Winners, Losers, and Social Loss from an Import Quota
Canadian consumers lose because price rises
Canadian producers of gain because they get to produce more at a
higher price
Importers of T-shirts gain
Society loses: a deadweight loss arises
No Import Quota Import Quota
o Nicole Wallenburg
Economics
Mr. Parkin
Oct 26, 2011
No Import Quota Import Quota
o
Other Import Barriers
o Thousands of detailed health, safety, and other regulations restrict
international trade
Export Subsidies
o An export subsidy is a payment made by the government to a domestic
producer of an exported good.
o Export subsidies bring gains to domestic producers, but they result in
overproduction in the domestic economy and underproduction in the rest
of the world and so create a deadweight loss.
The Case Against Protectionism
Despite the fact that free trade promotes prosperity for all countries, trade is restricted.
Two classical arguments for restricting international trade are
The infant-industry argument
The dumping argument
The Infant-Industry Argument
The infant-industry argument is that it is necessary to protect a new industry
from import competition to enable it to grow into a mature industry that can
compete in world markets.
This argument is based on the concept of dynamic competitive advantage, which
can arise f
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