IB Economics - Types of Trade Protection in International Economics

This study note for IB Economics covers Types of Trade Protection in International Economics

Trade protection refers to policies and measures employed by governments to restrict imports and protect domestic industries from foreign competition. Common methods include tariffs, quotas, subsidies, and administrative barriers. These measures can influence the economy in various ways, impacting different stakeholders such as domestic producers, foreign producers, consumers, and the government. Understanding the effects of these trade protection measures is crucial for students studying international economics.

1. Tariffs

Definition: A tariff is a tax imposed on imported goods, making them more expensive compared to domestically produced goods. This encourages consumers to buy domestically produced items.

Effects on Stakeholders:

• Domestic Producers:
  • Positive: Tariffs make imported goods more expensive, reducing foreign competition and allowing domestic producers to increase their market share and profitability.
  • Example: The U.S. imposed tariffs on Chinese steel to protect domestic steel manufacturers, helping them maintain jobs and production levels.
• Foreign Producers:
  • Negative: Tariffs increase the cost of their products in the importing country, leading to reduced sales and market share.
  • Example: European wine producers faced higher costs when the U.S. imposed tariffs on their products, leading to a decline in exports to the U.S.
• Consumers:
  • Negative: Consumers face higher prices for imported goods due to tariffs, leading to a decrease in consumer surplus and a reduction in the variety of available products.
  • Example: American consumers paid more for washing machines after the U.S. imposed tariffs on imports, with prices increasing by approximately 12% in 2018.
• Government:
  • Positive: Generates additional revenue from the collected tariffs, which can be used for public spending.
  • Negative: May lead to trade wars and retaliation from other countries, potentially harming other sectors of the economy.

Real-World Data:

• In 2018, U.S. tariffs on Chinese imports averaged about 19%, up from 3% in 2017. This led to increased costs for U.S. businesses and consumers, estimated at around $57 billion.

2. Quotas

Definition: A quota is a limit on the quantity of a good that can be imported into a country. Quotas restrict supply, thus protecting domestic industries from excessive foreign competition.

Effects on Stakeholders:

• Domestic Producers:
  • Positive: Quotas limit foreign competition, allowing domestic producers to sell more products and increase their market share.
  • Example: The European Union's quota on Chinese textile imports protected EU textile manufacturers from cheaper Chinese products.
• Foreign Producers:
  • Negative: Quotas restrict the amount they can sell in the importing country, leading to loss of potential revenue and market access.
  • Example: Japanese car manufacturers faced limitations in exporting vehicles to the U.S. during the 1980s due to imposed quotas.
• Consumers:
  • Negative: Reduced supply of imported goods often leads to higher prices and less variety, negatively impacting consumer choice and welfare.
  • Example: Quotas on dairy imports in Canada keep prices high for consumers, as imported competition is limited.
• Government:
  • Mixed: Does not generate revenue directly (unlike tariffs) but may reduce the need for subsidies to domestic industries. However, quotas can lead to inefficiencies and potential retaliation from trading partners.

3. Subsidies

Definition: A subsidy is financial support provided by the government to domestic producers to lower their production costs and make their goods more competitive in the domestic and international markets.

Effects on Stakeholders:

• Domestic Producers:
  • Positive: Subsidies lower production costs, allowing them to lower prices, increase output, and improve competitiveness both domestically and internationally.
  • Example: The U.S. provides subsidies to its agricultural sector, supporting farmers and making U.S. agricultural products cheaper on the global market.
• Foreign Producers:
  • Negative: Subsidies give domestic producers an unfair competitive advantage, making it harder for foreign producers to compete in both domestic and global markets.
  • Example: European complaints about U.S. subsidies to Boeing, claiming it gives an unfair advantage over the European manufacturer Airbus.
• Consumers:
  • Mixed: While consumers may benefit from lower prices due to subsidies, they also bear the cost indirectly through taxes used to fund these subsidies.
  • Example: Agricultural subsidies in the EU keep food prices lower, but taxpayers cover the cost.
• Government:
  • Negative: Subsidies are a financial burden on government budgets and can lead to misallocation of resources if industries become reliant on continuous government support.

Real-World Data:

• The U.S. government spent over $38 billion on agricultural subsidies in 2020, primarily supporting farmers affected by trade wars and the COVID-19 pandemic.

4. Administrative Barriers

Definition: These are non-tariff barriers that include customs procedures, regulations, and standards that make it difficult for imported goods to enter the market.

Types of Administrative Barriers:

• Health and Safety Standards: Requiring imported goods to meet specific local standards.
• Bureaucratic Delays: Lengthy customs procedures and paperwork requirements.
• Import Licensing: Restrictions on the number of import licenses issued.

Effects on Stakeholders:

• Domestic Producers:
  • Positive: These barriers can protect domestic industries by making it more challenging for foreign goods to enter the market.
• Foreign Producers:
  • Negative: Increased costs and delays reduce their competitiveness and market access.
• Consumers:
  • Negative: May face higher prices and reduced availability of goods due to restricted imports.
• Government:
  • Mixed: While not generating revenue directly, these barriers can protect domestic jobs but may also lead to trade disputes.

Real-World Example:

• India has strict labeling and packaging requirements for imported food products, creating barriers for foreign companies trying to enter the Indian market.