<4.2 PROTECTIONISM> 

• TARIFFS, also known as customs duties, our taxes on imported goods, and the most common form of trade protection. Tariffs have two purposes. The first is to protect a domestic industry from foreign competition and is called a PROTECTIVE TARIFF and the other is to raise revenue for the government and this is called a REVENUE TARIFF. Whatever the. Purpose. The effects on the economy are the same. 

Do you remember the rationale behind using indirect taxes on cigarettes? Wasn't it to correct a market failure? Cigarettes were over-consumed beyond the socially optimal level right?

The majority of the articles regarding tariffs are in fact about governments imposing anti-dumping tariffs, which  proven mean the tariff is actuall correcting a misallocation. of resources as there is obver production by a high cost producer and underproduction from a low cost producer.

• An IMPORT QUOTA (or more simply, quota) is a legal LIMIT ON THE QUANTITY of a good that can be imported over a particular time period (typically a year). The effects of quotas are similar to the effects of tariffs, except that they usually DO NOT CREATE REVENUE FOR THE GOVERNMENT. 

• When the government sets a quota, it ISSUES A LIMITED NUMBER OF QUOTA LICENCES.

• Usually, the GOVERNMENT GIVES THE LICENSES TO THE GOVERNMENTS OF EXPORTING COUNTRIES WHO IN TURN DISTRIBUTE THEM TO THEIR OWN EXPORTERS/PRODUCERS.

• These EXPORTERS/PRODUCERS are now able to RECEIVE A PRICE HIGHER THAN THE PRICE THEY WOULD HAVE ACCEPTED (Pw), and this GAIN is referred to as ‘QUOTA RENTS’. 

• NOTE: It is also possible for the government to sell the licences to domestic importers, in which case it gains the quota revenue. 

• Alternatively, the government could distribute the licences to domestic importers without charging a price, so the importers gain the quota revenues, because they buy the imports at price PW and sell them at Pq. However, neither of these two options are commonly practised

• PRODUCTION SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT SOLD DOMESTICALLY which allows them TO LOWER THEIR UNIT COST so they are MORE COMPETITIVE when COMPETING with IMPORTS within the DOMESTIC MARKET. 

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• These types of subsidies are NOT TO BE CONFUSED WITH EXPORT SUBSIDES, which are PAYMENTS PER UNIT OF OUTPUT granted by the government to domestic EXPORTING firms TO ALLOW THEM TO LOWER THEIR UNIT COSTS so that their EXPORTS ARE MORE COMPETITIVE when COMPETING ON THE WORLD STAGE. 

• These types of subsidies are deemed ILLEGAL UNDER WTO REGULATIONS as they are considered ANTI-COMPETITIVE and go against the WTO's objective of full 'Trade-liberalisation'.

• The EFFECTS of PRODUCTION SUBSIDIES ARE NOT AS HARMFUL AS those of TARIFFS and QUOTAS, because while they all encourage inefficient domestic production, ONLY SUBSIDIES HAVE NO NEGATIVE EFFECT ON CONSUMPTION (NO LOSS OF CONSUMER SURPLUS).

• EXPORT SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT EXPORTED which in effect allows domestic exporting firms TO SELL MORE EXPORTS to FOREIGNERS at the world price WP*, (thanks to the subsidy), whilst charging, DOMESTIC CONSUMERS A HIGHER PRICE (As they don't benefit from the subsidy).

• Exports sold in this manner on the INTERNATIONAL MARKET are referred to as 'DUMPED', while the process is referred to as 'DUMPING'.

• If proven, these types of subsidies are deemed ILLEGAL UNDER WTO REGULATIONS as they are considered ANTI-COMPETITIVE and go against the WTO's objective of full 'Trade-liberalisation' based on the theory of comparative advantage.

• * We assume they are small-scale exporters, as such the increase in exports is not large enough to impact world supply and lower the world price.

• Almost all the cases of dumping that make the headlines involve export subsidies given to exporters that already have significant market shares such as China and the solar panel market, therefore the additional exports they produce thanks to the subsidies actually impact world supply enough to actually lower it, which makes the dumped price even lower, threatening domestic producers further. 

• Can you sketch a 2 country diagram to model this?

• 1) Whenever a good is imported from another country, it must go through a number of customs procedures involving INSPECTIONS, VALUATION (determining the value of the good), and others. In an effort to impose obstacles to imports and reduce their quantity, countries may increase the amount of RED-TAPE CHECKS and procedures, making them very TIME-CONSUMING and DIFFICULT. 

• 2) In addition, importing countries can impose requirements that imported goods MUST BE PACKAGED IN A PARTICULAR WAY. Since exporters do not always fulfill the requirements, the quantity of imports is reduced. 

• 3) Further, many countries impose requirements that imported goods must FULFIL PARTICULAR TECHNICAL STANDARDS, which involve HEALTH, SAFETY, and ENVIRONMENTAL CONDITIONS. In many cases, these standards automatically eliminate a range of imports. 

• 4) In other cases, certain products must UNDERGO TESTING and INSPECTION PROCEDURES that are so COSTLY and TIME-CONSUMING that once again the effect is to reduce the quantity of imports. 

• 5) In some cases, the imposition of such standards is justified by governments’ concern for the health and safety of the domestic population, as well as possible negative environmental effects of imported goods. However, it is generally believed that the excessive use of these kinds of measures by governments is a disguised attempt to limit imports, and therefore is a kind of trade protection.

• Using an international trade diagram, explain the likely impact of the removal of import quotas on North Macedonia’s production of wine.

• Using an international trade diagram, explain how a subsidy could help Tanzanian dairy farmers compete against imported dairy products.

• Using an international trade diagram for the US market, explain how the imposition of a 15 % tariff on imported garments from Bangladesh would affect the revenue earned by Bangladeshi producers.

• Using an international trade diagram, explain the effect on consumers in Uruguay if a quota is imposed on cheese imports from the EU.

• Using an international trade diagram, explain the effect on domestic chicken producers revenues in Singapore if a production subsidy is removed.

• Go to the WTO website HERE and find a dispute.

• Now look for an article related to this dispute.

• Now you have 

• Before any government intervention, we can see that the country is an EXPORTER, producing Q3 output at the world price (WP), of which Q2 is consumed domestically, whilst the rest (Q2 to Q3) is exported.

• When offered an EXPORT SUBSIDY, they are willing and able to produce Q4 output, as they can receive a higher price of Ps. of which Q1 is consumed domestically, whilst the rest (Q1 to Q4) is exported.

• MORE EXPORTS are now SOLD at WP, thanks to the subsidy, however, DOMESTIC CONSUMERS PAY A HIGHER PRICE (Dom. price a/f sub), and subsequently consume less (Only Q1), hence this is an example of DUMPING.

• 1) After the government intervention, we initially see that 

  • • PS rises by (a + b + c).

    • CS falls by - (a + b).

    • Thefore the PS gains of (a + b) are canceled out by the losses of CS.

    • Leaving an initial net gain in TSS of + c.

• 2) When the cost of the subsidy is deducted - (b + c + d).

  • • The TSS gain of + c is canceled out.

    • The PS benefit of (a + b) has already been canceled so the subsidy costs of - (b + d) are not cancelled out.

    • Hence areas  b + d are the DWLs.

• This country was an importer, but when it receives the PRODUCTION SUBSIDY it not only pushes out imports and satisfies all domestic demand it has a surplus if it were to export, would constitute an EXPORT SUBSIDY, which is ILLEGAL.