Free Trade and Protectionism: An Overview
Key Objectives of the Unit
- Define free trade
- Evaluate arguments for and against protectionism
- Explain and illustrate free trade
- Define, explain, and illustrate types of protectionism
- Evaluate effects of tariffs, quotas, and subsidies on different stakeholders
- Evaluate the effectiveness of different types of trade protection
Free Trade
- Definition: Free trade occurs between countries when there are no barriers to trade imposed by governments or international organizations.
- Example: Frictionless movement of goods between countries (e.g., products moving between Chile and Argentina, the U.S. and Mexico, Japan and Korea).
Protectionism
- Definition: The use of tariffs, quotas, subsidies, or administrative barriers to make domestic producers more competitive by limiting imports.
- Purpose: Protect domestic industries by making it harder for foreign products to compete.
Types of Protectionist Measures
Tariffs
- Definition: Taxes imposed on imported goods, services, or resources.
- Impact: Increases the cost of imported goods, reducing their supply and causing domestic prices to rise.
- Example: A $1 imported product with a 50-cent tariff would cost $1.50, making domestic products more appealing.
Subsidies
- Definition: Government payments to domestic producers to increase domestic consumption or promote exports.
- Impact: Lowers production costs, increases domestic supply, and makes products more competitive internationally.
- Example: Corn subsidies in the U.S. lower production costs, encouraging more production and export.
Quotas
- Definition: Physical limits on the quantity of goods, services, or resources that can be imported.
- Impact: Creates shortages of imports, driving up domestic prices and increasing domestic supply.
- Example: A limit on steel imports would result in higher domestic steel prices.
Effects of Protectionism
- Leads to a misallocation of resources
- Causes a loss of total welfare globally
- Interferes with the natural equilibrium of goods and services
Videos for Further Clarity
- Protective tariff
- Protective subsidy
- Protective quota
Summary: This unit will build your understanding of international economics, focusing on the impact of protectionist measures on global trade and domestic markets. The main themes revolve around the balance between protecting domestic industries and promoting free trade.