(2018) A Level H2 Econs Paper 2 Essay Q6

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6. “Across the globe, people are wondering why the US, usually the leader in free trade, is now taking a protectionist stance.” 
Source: Foreign Policy Journal, February 2017 
 
(a) Describe two different types of protectionist policy measure and explain how each type would affect trade. [10]

Tariffs  

(explanation adapted from https://pressbooks.bccampus.ca/uvicecon103/chapter/4-7-tariffs/

•  We refer to an example of the US Lumber market. 

• In the domestic market, domestic eq price is $1000, eq qty is 40 million. 

• World price is $400, which is substantially lower than $1000. 

• At the world price, US consumers will consume 70 million units of lumber, while US producers will only be able to sell 10 million units of lumber, down from the 40 million units. 

• In essence at the world price, 60 million units of lumber will be imported, with 10 million produced and sold locally. 

Upon the implementation of a tariff of $400 

Equilibrium price will effectively move to $800. 

At $800, US consumers will consume 50 million units of lumber, while US producers will produce 30 million units. This leaves 20 million units to be imported from the rest of the world. 

Domestic producers do better, as they sell 20 million more units (on top of their original 10 million). Consumers are worse off with a higher price. Government gains too, from tariffs revenue collected. 

 End outcome 

Consumers -> Decrease in areas A, B, C, D 

Producers (Domestic) -> Increase in Area A 

Government -> Increase in Area C 

Overall -> Government gained C, Producer gained A. Consumers lost A, B, C, D. Deadweight loss to society = B & D 

Administrative Barriers 

Countries sometimes use legislation to implement administrative rules relating to:

1. Food safety 

2. Environmental standards 

In order to implement protectionist measures guised by other means, countries may impose unreasonable and ‘artificial’ standards relating to imports – but these standards were really meant to restrict the amount of imports coming into the country to protect domestic industries. 

(b) Discuss the extent to which protectionism would be beneficial to an economy. [15]

Introduction 

• Protectionism is the deliberate erection of artificial barriers to trade, with the intent of sheltering domestic firms from foreign competition.  

• Recent examples include Trump’s trade tariffs on Chinese goods. 

How Protectionism can be beneficial to an economy 

Infant industry argument 

• Infant industries may develop comparative advantage over a longer period of time. Without any form of protection, they may be forced to shut down in the short term, as they are unable to compete with global competitors.  

• It may be in the interest of governments to help such industries grow and develop CA over a longer term, which may benefit the country. 

• However, CA may not necessarily be developed even with protectionism. 

Protect home employment argument 

• In times of recession, there may be massive unemployment as a result of the fall in demand.  

• Government could take action to protect industries through the provision of subsidies, so that exports can remain competitively priced in order to sustain a high demand -> unemployment kept at bay 

Predatory dumping argument 

• Protectionism can also be a valid argument against predatory dumping – the deliberate dumping of goods and services at prices below the market prices (sometimes even below cost prices!).  

• This is to prevent foreign competition from unfairly driving out domestic firms from the market through such actions. 

• However, it is hard to differentiate between ‘dumping’ and ‘predatory dumping’.  

• Dumping may be beneficial, especially in the case of raw materials and intermediate inputs (lower costs). 

How Protectionism may not be beneficial to an economy 

Retaliation and trade wars 

• When countries allow / implement protectionism policies (think that protectionist policies are ‘ok’), they may end up affecting their trading partners who may suffer from lower export sales.  

• Their trading partners may take steps to protect their own industries and in this sense ‘retaliate’ by imposing protectionists policies of their own ->This will now affect the country since exports now lose competitiveness as they are more ‘expensive’ in the other countries due to protectionists measures, such as tariffs, being imposed.  

• Trade wars may thus be invoked.  

Beggar-thy-neighbour 

• When a country imposes protectionist measures, it affects the demand for the trading partner’s exports. Trading partner will experience a fall in (X – M) -> fall in AD -> fall in RNY (via k process) 

• A fall in incomes implies a decrease in purchasing power -> trading partner will buy lesser imports from the country 

Increases costs and lowers SOL 

• Countries may be importing intermediate inputs and raw materials from other countries, which are cheaper.  

• The imposition of protectionists policies against trading partners, will increase the costs of local producers importing such input -> COP increases for local producers. Export competitiveness may fall as a result à fall in (X – M).  

• Local consumers will also experience a fall in SOL as they are able to buy less, given the higher prices. 

Conclusion 

While protectionism may seem justified under specific circumstances to prevent dumping, it has far-reaching implications for the global economy. Governments must carefully consider the long-term implications before attempting any protectionist policies. 

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