21.1 Protectionism: An Indirect Subsidy from Consumers to Producers

Trade barriers and protectionism are key concepts in international economics. These measures, like tariffs and import quotas, aim to protect domestic industries from foreign competition. However, they often lead to higher prices for consumers and reduced economic efficiency.

Protectionist policies shift supply curves, creating price gaps between domestic and world markets. While they may benefit some domestic producers, they generally decrease consumer surplus and overall economic welfare. Understanding these effects is crucial for grasping the complexities of global trade and economic policies.

Trade Barriers and Protectionism

Forms of protectionism in trade

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  Chapter 14.5 – Protectionism: An Indirect Subsidy from Consumers to Producers – Agribusiness ... View original

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• Tariffs
  • Taxes levied on imported goods to raise their prices and make them less competitive compared to domestic goods
  • Lead to a reduction in the quantity of imports demanded (steel, automobiles)
• Import quotas
  • Quantitative limits on the amount of a specific good that can be imported into a country
  • Create artificial scarcity, driving up prices of imported goods and limiting consumer choice (sugar, textiles)
• Nontariff barriers
  • Regulations, standards, or bureaucratic procedures that increase the cost and difficulty of importing goods
  • Licensing requirements, complex customs procedures, and product standards discourage trade and limit market access (safety regulations, labeling requirements)

Effects of protectionism on markets

• Supply curve shifts to the left due to tariffs and import quotas
  • Reduced supply leads to higher equilibrium prices and lower equilibrium quantities
  • Domestic producers can charge higher prices due to reduced competition from imports
• Nontariff barriers increase the costs of importing
  • Higher costs shift the supply curve to the left, similar to the effects of tariffs and quotas
• Protectionism creates a gap between domestic and world prices
  • Domestic prices are higher than world prices, benefiting domestic producers at the expense of consumers
• Reduces overall market efficiency by allocating resources to less efficient domestic producers instead of more efficient foreign producers
  • Limits gains from specialization and trade (comparative advantage)
• Can contribute to a trade deficit by reducing imports and potentially leading to retaliatory measures from trading partners

Economic impact of trade barriers

1. Decreased consumer surplus
   • Higher prices due to protectionism reduce the difference between consumers' willingness to pay and the market price
   • Consumers pay more for goods and have less variety to choose from
2. Increased producer surplus for domestic producers
   • Protectionism allows domestic producers to charge higher prices and capture a larger share of the market
   • Inefficient domestic producers may remain in business due to reduced competition
3. Deadweight loss occurs
   • Protectionism creates a net loss in total economic surplus
   • The loss in consumer surplus exceeds the gain in producer surplus and government revenue from tariffs
   • Resources are misallocated to less efficient producers, reducing overall economic efficiency
4. Potential increase in government revenue with tariffs
   • Tariff revenue is collected on imported goods (customs duties)
   • However, this revenue comes at the cost of higher prices for consumers and reduced economic efficiency
5. Decreased net national welfare
   • The combined effect of decreased consumer surplus, increased producer surplus, deadweight loss, and potential government revenue results in a net reduction in overall economic well-being
   • Protectionism hinders the benefits of international trade and specialization based on comparative advantage

Global trade and economic policies

• Free trade promotes economic efficiency and consumer welfare by allowing countries to specialize based on comparative advantage
• Globalization has increased international trade and economic interdependence, challenging protectionist policies
• Economic nationalism advocates for prioritizing domestic industries and can lead to increased protectionist measures
• The World Trade Organization works to reduce trade barriers and resolve disputes between member countries