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Protectionism - Barriers To International Trade

 

Import controls are barriers to the free movement of goods and service that seek to distort the pattern of trade between countries. In recent years, there has been a long running dispute between the European Union and the USA over bananas, beef, cashmere and steel.

 

A variety of import controls can be introduced:

 

Tariffs

A tariff is a tax on imports and is used to restrict imports and raise revenue for the government. We assume in the diagram below that producers from other countries can supply the good at a constant price of PW - their supply curve is perfectly elastic.

 

The domestic demand and domestic supply curves are shown. If the market price is PW output Q1 is produced by domestic firms and Q2 will be the demand from home consumers. Because Q2>Q1 imports will come into the economy to satisfy the excess demand.

 

A tariff is placed on the value of imports. This raises the price of imports to PW+T and as a result, domestic demand contracts to Q4 and domestic supply expands to Q3. Home producers can supply more at the new higher price. The tariff gives domestic firms a competitive boost. The volume of imports has reduced.

 

The effect of the tariff depends on the price elasticity of demand and the price elasticity of supply. A tariff will have a greater effect the more elastic the demand and supply. If the demand is inelastic then the imposition of a tariff will have little effect on the level of imports.

 

 

The introduction of tariffs by one country can lead to retaliation responses from other countries. This retaliation can lead to damaging trade-wars.

 

The imposition of a tariff will impose a cost on society.  After the tariff is imposed the consumers have to pay a higher price and hence consumer surplus will fall from ABC to ADE.  The cost to consumers is therefore EDBC (areas 1+2+3+4).  Part of the cost is redistributed as benefit to other parts of society.

 

Firms receive a higher price and their producer will increase by area 1.  The government receives extra revenue from tariff receipts - area 3 i.e., Q4 Q3 Tariff.

 

However part of this cost is not recovered.  Areas 2 and 4 are a net cost to society.  Area 2 represents the extra costs of producing at home rather than importing.  Area 4 represents the loss in consumer surplus as a result of the decrease in quantity from Q2 to Q4.  The government should weigh up the costs and benefits before implementing any tariffs.

 

Import Quotas

An import quota directly reduces the quantity of a product that is imported and indirectly reduces the amount of money that the export producers receive. The main beneficiaries of quotas are the domestic producers who face less competition.

 

Embargoes

This is where the government completely bans certain imports, e.g., drugs; or exports to certain countries, e.g., to enemies during a war.

 

administrative barriers

Regulations may be designed in such a way to exclude imports. For example in Germany lagers had to pass certain purity tests and in Japan importers must complete so much paperwork and satisfy so many safety tests that many are put off.

 

procurement policies

This is where governments favour domestic producers when purchasing equipment, e.g., defence equipment.

 

Voluntary Export Restraint

A voluntary export restraint is similar to an import quota. With a VER, the exporting country voluntarily restricts the number of goods that it ships to its trading partner. Foreign exporters must purchase licences from its government and then exports its allotted amount. The price they receive for their goods, minus the cost of the export licence, is their profits

 

Export Subsidy

An export subsidy is a payment to a domestic producer who exports a good abroad. If receiving an export subsidy, a firm can remain competitive abroad by exporting up to the foreign price (because the subsidy will cover some of the difference) yet receive the higher price domestically. The effects of a subsidy are the opposite of those of a tariff. In the spring of 2001, a trade dispute arose between Canada and Brazil about trade-distorting export subsidies by the Canadian Government to its firms when trying to sell aircraft to the United States.

Further Reading

US imposes heavy tariffs on steel imports (Financial Times 6.3.02)
EU promises to lodge swift WTO appeal (Financial Times 6.3.02)
Tariff: WTO urges US to lift lamb tariffs (bbc 2.5.01)
Tariff: China-Japan trade row escalates (bbc 19.6.01)
Tariff : The Economy EU boycott call over US tariffs (bbc 20.7.99)
Tariff: Setback for US steel makers (bbc 22.6.99)
Tariff and Quota: US, Russia sign steel deal (bbc13.7.99)
Quota: China slams US over textile quota cut (bbc 7.5.98) 
Embargo: UN demands end to Cuba embargo (28.11.01)
Embargo: UN on Sierra Leone embargo (bbc 5.1.01)
Taleban arms embargo in focus (bbc)
Voluntary export restraints: USA and Japan
Analysis: Bush's protectionist tendency (bbc 7.6.01)
US protectionism warning (9.6.99)
EU launches steel-dumping probe (14.5.99)

 

 

E-mail Steve Margetts