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Examining the tools governments use to restrict trade and the economic arguments for and against these measures.
Why does a smartphone cost 1,200 in another? It’s often not the cost of parts or labor, but a 'hidden wall' designed to protect local interests at your expense.
Governments use Protectionism to shield domestic industries from foreign competition. The most common tool is a Tariff, a tax on imported goods. When a tariff is applied, the domestic price rises from the world price to . This benefits domestic producers, who can sell more at higher prices, but hurts consumers, who face higher costs and lower variety. A Quota achieves a similar result by setting a physical limit on the quantity of a good that can be imported. While both raise prices, a tariff generates government revenue, whereas a quota often results in Quota Rent—extra profit for the foreign producers who hold the import licenses.
Suppose the world price of steel is $P_w = \$500\ per ton.
1. Calculate the new domestic price: $P_t = 500 + 50 = \$550$.
2. Domestic producers increase supply because they can now compete at the higher price.
3. Domestic consumers decrease demand due to the higher price, leading to a net loss in consumer surplus.
Quick Check
What is the primary difference between a tariff and a quota regarding government finances?
Answer
A tariff generates tax revenue for the government, while a quota does not directly provide revenue unless the government sells import licenses.
Why would a government intentionally raise prices for its citizens? Proponents argue for the Infant Industry Argument, suggesting that new domestic industries need temporary protection to develop economies of scale before competing globally. Another common justification is National Security, which claims a country must not rely on foreign nations for vital goods like steel, energy, or semiconductors. Finally, Anti-dumping measures are used when foreign firms sell goods below their cost of production to drive out domestic competition. However, critics argue these 'temporary' measures often become permanent due to political lobbying.
Instead of a tariff, a government provides a Subsidy of $\$20P_wP_w + Subsidy$.
3. The cost is shifted from the consumer to the taxpayer, as the government must fund the subsidy through the budget.
Quick Check
Why is the 'Infant Industry' argument often criticized by economists?
Answer
Because protected industries often lose the incentive to become efficient and competitive, and the 'temporary' protection rarely ends.
A country imposes a tariff that raises the price of sugar by $\$0.10\Delta P = 0.10\Delta Q = 200,000DWL = \frac{1}{2} \times 0.10 \times 200,000 = \ in lost economic efficiency.
Which group is the primary beneficiary of a new import tariff?
If a government wants to protect an industry without raising prices for consumers, which tool should it use?
An embargo is a partial restriction on the quantity of goods imported.
Review Tomorrow
In 24 hours, try to sketch a supply and demand graph showing the two triangles of Deadweight Loss caused by a tariff.
Practice Activity
Research a recent real-world trade dispute (e.g., US-China tech tariffs) and identify which protectionist argument was used to justify it.