Lecture Notes: Protectionist Policies and Their Implications

Introduction

• Protectionist Policies: Barriers to trade to protect domestic firms from foreign competition.
• Focus of Lecture: Reasons for protectionism and linking them to the tariff diagram.

Reasons for Protectionism

1. Infant Industry Argument

• Purpose: Protect small industries to grow, develop economies of scale, and become internationally competitive.
• Diagram Link: Tariff increases import prices, encouraging domestic output (from q1 to Q3), supporting business growth.
• Evaluation:
  • Risk of complacency and inefficiency without competition.
  • Importance of monitoring and setting an end date for protectionist measures.
  • Risk of retaliation from foreign countries.

2. Protection Against Dumping

• What is Dumping? Selling goods overseas below production cost, harming local industries.
• Solution: Use tariffs to increase import prices, reducing dumping advantage.
• Challenges:
  • Proving dumping requires evidence and WTO adjudication, which is time-consuming.
  • Bypassing WTO risks sanctions and retaliation.

3. Protecting Employment

• Concern: Free trade may lead to structural unemployment as uncompetitive industries decline.
• Use of Tariffs: Increase domestic output (from q1 to Q3) to save/create jobs.
• Evaluation:
  • Delays inevitable industry decline if lacking comparative advantage.
  • Better alternative might be training and relocation programs.
  • Risk of retaliation leading to more job losses.

4. Standards as Protectionism

• Types: Health and safety, product safety, environmental, and worker standards.
• Purpose: Protect consumers, workers, and the environment.
• Challenges: Must prove necessity to WTO to avoid sanctions and retaliation.

5. Government Revenue

• Revenue from Tariffs: Useful for funding development in developing countries or subsidies in developed countries.
• Elasticity Impact: Inelastic demand/supply leads to more revenue; elastic reduces it.

6. Reducing Current Account Deficit

• Theory: Imposing tariffs reduces imports, improving trade deficit (ceteris paribus).
• Evaluation:
  • Unlikely export revenue remains unchanged due to foreign retaliation.
  • Elasticity affects the extent of import reduction.

General Evaluation of Protectionist Policies

• Market Distortion: Higher prices and reduced quantities harm consumers (lower consumer surplus, higher living costs).
• Regressive Impact: Tariffs disproportionately affect lower-income households, widening inequality.
• Business Impact: Increased raw material costs and restricted access can harm businesses, even leading to bankruptcy.
• Retaliation: High risk of trade wars with harsher retaliatory measures.
• Irony of Harm: Aimed to help domestic firms but could harm due to increased production costs and reduced export revenue.
• WTO Compliance: Potential sanctions if protectionist policies break WTO rules.
• Allocative Inefficiency: Tariffs cause inefficiency (area G on diagram).
• Cost of Protection: High costs of subsidies could strain government finances.

Conclusion

• Protectionism is a complex subject with significant pros and cons.
• The debate on protectionism is ongoing, with strong arguments on both sides.
• Note: Understanding the implications of protectionist policies is crucial in evaluating their effectiveness.

These notes summarize the key points of the lecture on protectionism, including reasons for implementation, potential benefits, and significant drawbacks associated with protectionist measures. The notes also incorporate evaluation points to provide a balanced view of the topic.