IBDP Economics - Protectionism

1. Chapter 21.
Unit 3.1
CPS GLOBAL SCHOOL _ IB ECONOMICS _ MONICA

2. The case of protectionism:
CPS GLOBAL SCHOOL _ IB ECONOMICS _ MONICA
 Protectionism is the placement of legal restrictions on
international trade, and includes tariffs, quotas, subsidies and
other bureaucratic barriers.
 Countries try to protect certain industries from unpredictability
and threat of foreign competition.
 Protectionist measures run counter to the principle of
comparative advantage.
 Free trade -> lowering protectionist barriers and realizing
those gains from trade.
 Countries work out these agreements through tedious
negotiation at the global level thro WTO and at the regional
level through trade blocs such as
• European Union
• North American Free Trade Agreement (NAFTA)
• Mercado Comun del Sur (MERCOSUR) / Common market of
the South.

3. Arguments for protectionism
CPS GLOBAL SCHOOL _ IB ECONOMICS _ MONICA
Proponents argue vulnerable domestic markets face unfair and damaging foreign
competition.
Following arguments raised in times of economic turmoil.
 To protect domestic employment:
Keeps local jobs safe from foreign competition. Heard from industries in a ‘sunset’
stage of relative decline compared to international competition. Require more
time to adjust to modernize and improve efficiency. Modernize – less empl. Press
parliament for protectionist advantages.
 To protect sunrise / infant industries:
Infant industries are those that are newly developed and have not had an opport
to develop the econ of scale and low costs that are achieved by selling to a large
market. Future champions. These industries should be sheltered .
Strategy -> block imports with tariffs and other trade barriers. Subsidies to the
infant.
Sunrise industry -> success of countries developed dramatically in a relatively
short period.
Strategy -> identify potential growth industries, support them with state subsidies.
Discourage domestic competition by levying high import tariffs.
Critics -> never grow up fully and seek state support long after infancy and

4. Arguments for protectionism (Contd…)
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 To counteract relative domestic tax differences->
countries that rely heavily on VAT have a competitive advantage over
those that do not sell their goods in this system.. A country with no
VAT, tax burden falls on domestic producers.
less built –in tax
More built-in tax
 To prevent dumping of foreign goods onto the
domestic market ->
Dumping is the selling of goods to another country at a price below the
original domestic pdn costs. Exporters facing loss. Dump goods to
drive competition and raise prices when domestic competition is
destroyed
Countries believed to be victims can resort to WTO. Allegations difficult
to confirm
VAT
Country
Non VAT
Country

5. Arguments for protectionism (Contd…)
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 To diversify the pdn base of a developing country->
Poor countries benefit from selectively protecting some domestic mkts
to diversify economic base. Such protection on ‘sunrise’ industries
make country less vulnerable to swings in global mkt prices. Ignores
benefits due to comparative advantage by demonstrating risks of
over-specialization.
 To enforce pdt stds ->
Pdt stds -> protect consumers from hazardous pdts and ensure
reputation of quality pdn. Stds – inc costs of pdn. Used to challenge
imports as a threat to national safety or health. Derived from
scandals, disputed scientific claims about new methods of pdn.
 To raise govt revenue ->
Customs duty – vital source of money where income is low. Distort
mkts by taxing necessities. Limit importation of imp resources
needed for growth & develop.
 To protect against unfairly low labor costs ->
Imported goods produced at wage rates far below those paid in their
own domestic industries. Lower wages and lower std costs makes it
impossible for workers at home to get a living wage and provided
with safe and reasonable work environments.

6. CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 To protect against strategic industries ->
Military / defence needs produced domestically for security
reasons. Make country vulnerable if relations grow
strained.
 To overcome a balance of payments deficit ->
Balance of payments – flow f money into and out of a
country => TRADE BALANCE. Spending excessively on
Imports accelerates trade deficit-> Protectionist policies.
=> EXPENDITURE – SWITCHING. Long term, deny
potential gains from comparative advantage.
 To improve terms of trade ->
Terms of trade = Ratio of export prices to import prices.
Increase tariff to decrease demand for an imported good
and thereby price of the imported good. Reduction of
demand must outweigh the increased price effect of the
tariff.

7. The case against protectionism
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 Misallocation of resources ->
Compel consumers to pay higher prices. Capital and labour doesn’t go
to efficient industries that can realize their comparative advantage
but rather to a big inefficient firm that is politically connected but on
the decline.
 Escalation to a trade war ->
Disputes on tariff amd unfair bureaucracy result in a dispute and into a
trade conflict. Trade @ halt and economic growth is imperilled.
 Protectionism as a corruption magnet ->
Higher tariffs – more revenues to that industry/ producers. More
incentive to bribe lawmakers to enact such laws and loss of integrity
of the Govt.
 Domestic complacency causes higher prices and costs->
Firms understand real profits come from protection, more resistance to
change(modernization and greater efficiency weaken their case for
assistance). Consumers and firms that buy from these firms suffer
decreased output and lower std of living especially when protected
goods are necessities.

8. The case against protectionism(Contd…)
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 Higher import costs->
Directly affect firms and consumers who buy imported
goods. Drive Imports out of market. Domestic
producers and consumers pay high and possible
inferior goods. High costs – less output and less std
of living.
 Reduced export competitiveness->
Firm that hopes to export suffer indirect harm of having
workers and resources drawn away by inefficient
producers. Corrode seemingly unrelated export
based business.

9. Administration Barriers
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 Bureaucratic barriers – waves of paperwork and
legal requirements that increase cost of importing.
Possibility to extend and amplify these requirements
to frustrate potential importers.
 Product standards – health, safety and
environmental considerations . Imports meet specific
technical standards. Importers required to test and
prove the safety and quality of the good.
 Environmental standards – depletion of common
access resources and endangered species
 Qualifications – teachers, physicians, lawyers,
electricians require specific qualifications to work
legally in a country.

10. Exchange rates
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 Lower exchange rates - exports are cheaper and
more attractive at the world market and imports are
less desirable protecting domestic markets

11. Nationalistic campaigns
CPS GLOBAL SCHOOL _ IB
ECONOMICS _ MONICA
 Promote products in patriotic terms. Appeal to fellow
countrymen to protect domestic employment. Initially
successful . Eventual cost of advertising and
publicity higher