TARIFFS & OTHER MEASURES

PROTECTIONISM

Definition of Tariffs

Tax on imports which can be

1) Specific2) Ad-Valorem

What is tariffs?

Resulting in…1)Decrease in SS import2)Increase in equilibrium price of Imports

3)Domestic goods get cheaper

Quantity of Cars

Price of Cars

Q1

Q2 Q3 Q4

Sw

Sw + tariff

Dd

Ss

P1

P2

A

B C

D

Assuming market for cars•World supply is at Sw and the price of cars is at P1.•At this price, consumption of cars is at Q4 but the no. of domestically produced cars are at Q1. To meet the demands of the people, Q1Q4 are imported. •A tariff of eq $5000 is applied. This increases the Sw upwards to Sw + tariffs. Hence, now the domestic production increases to Q2 and the domestic consumption decreases to Q3 after rationing process. Hence, only Q2Q3 are imported. •B+D is the overall loss in society welfare due to imposition of tariff.

•Saves jobs and allows small companies to grow.

eg: In 1984, the USA consumers paid $42000 for each textile job that was preserved, which is higher than the normal income of textiler

Advantages:

• Dependant on PED/PES of domestically produced goods.• PED of imports• May result in retaliation of trade. Can be good as it

forces the other country to open its economy

Eg. the USA threatened to retaliate against Japans trade. Afraid to lose the trade, Japan agreed to abolish all tariffs on American cigarettes. American market shares were then tripled.

However, it is ineffective…

PROTECTIONISM1)INFANT INDUSTRY

to protect new industries that has potential comparitive advantage

2) PREVENTS DUMPING

3) PROTECT UNEMPLOYMENTto prevent unemployment caused by import penetration

4) CORRECT TRADE DEFICIT

5) PREVENT EXPLOITATIONof labour, low wages and poor working environments

Is the process of selling a product under its estimated value.This could cause the domestic producers to be forced to quit the market.

WHAT IS DUMPING?

China Soap

Singapore soap

Consumers will purchase China soap as it is cheaper and affordable.

Singapore producers are unable to remain price competitive hence are forced out of the market.

Cost of Production - $1.Sold in China for - $1.30

With the help of government, exports at $0.80

Cost of Production - $1Sold in Singapore for > $1 to gain profit.

However with Tariffs;

China Soap

To protect its domestic producers, Singapore implements a 50% tax on China Soap.China soap is then sold at $1.20

Positive Negative

Domestic producers able to remain price competitive

Dead weight loss caused by increase in price

Domestic producers to rely too much on government, making them less effective and competitive in market

Trade Deficit:Occurs when total value of imported goods > exported goods which results in negative BOP.

Eg. USA faced a trade deficit of US $47.8 billion as there was an increase in import of oil to meet demands but a decrease in export in shipment to Europe.

Quantity of cars

Price of Cars

Q1

Q2 Q3 Q4

Sw

Sw + tariff

Dd

Ss

P1

P2

A BC D

EF

G

Tariffs increase price of imported goods hence decreases the quantity demanded of imported goods. Hence, citizens money spent on imports decreases from EFG to FC. However C is paid to the government because of the tax imposed.Consumers switch to cheaper home brands hence domestic consumption increases hence promotes economic growth.

However, this method is not feasible as it is only a short term answer as it does not tackle the root problems of trade deficit.

Administrative

Barriers

Administrative BarriersImposition of Strict

Standards on ingredients of food

Deliberate excessive custom

procedures

• Imposition of strict standards on food ingredients

Barrier

•Some governments impose strict standards on ingredients of food so that fewer markets can export into their country. What• Japan’s imposition of strict standards on rice imports

to protect her domestic producers.• • Japan maintained a rigid stubborn stance opposing

foreign• imports of rice despite much disapproval from many

countries.

Example

• Deliberate excessive custom proceduresBarrier

• Excessive control and inefficiencies in customs procedures

What

• Complexities and resultant disputes over classification, valuation and overall clearance procedures stand as depressing phenomena in the case of trade facilitation in Association of Southeast Asian Nations (ASEAN) countries.

Example

TRADING BLOC

Trade Bloc‘Free trade agreement’ (FTA) between a subset of countries,

designed to significantly reduce or remove trade barriers within member countries.

When a trade bloc comprises neighbouring or geographically close countries, it is referred to as a ‘regional trade (or integration) agreement’

Principle Characteristics

Implies a reduction or elimination of barriers to trade

Trade liberalisation is discriminatory

Implies only to member countries of trade bloc

AdvantagesAllows trading partners to go deeper and faster in their liberalisation process, addressing modern trade barriers which are more varied, instead of tariffs and quotas

AdvantagesEnsures the credibility of the reform process undertaken by one or several members of the trade bloc. It can serve as a mechanism for policy determination of its members, hence contributing to reducing uncertainty and increasing credibility about political and economic developments

DisadvantagesIf a country is able to manufacture and produce goods at a price that is far cheaper than your local regional manufacturers and the government sets up a trading bloc with that country, then it becomes cheaper for retailers to import those goods from overseas. This leads to economic difficulties for the local manufacturers and producers. This can increase the pressure on local suppliers and can also affect unemployment rates negatively.

DisadvantagesAffects regional businesses which are not part of the agreement due to higher tariffs and taxes on their exports thus causing an increase in price. This makes importing countries feel compelled to import from other suppliers.

Example on britain•Britain exchanged Pounds Sterling with Europe for Euros

•The trade agreement between European countries actually strengthened the value of the Euro

•But has a disadvantage on countries outside the agreement

VOLUNTARY EXPORTS

RESTRAINTS

What are VERs?A trade restriction (limit) by the exporting country on the companies that export their goods overseas. Created as the country would prefer to impose their own restrictions before the importing country can impose any tariffs/quotas on the goods in the future.ÞTo prevent the prices of the exports to increase after the tariff/quotas are imposed.An exporting company can avoid VERs. It can build manufacturing plant in the country to which the exports would be directed.ÞIt will not be bound by its country’s VER.

Advantage(s)Importing country Exporting country

Its less efficient industry can still strive

Keeps some of its market share earned through competition between itself and domestic producers

It profits most from such restriction. Eventually, it can increase the prices of the exporting goods, and earn more profits

Disadvantage(s)Importing Country

does not profit the most from such an agreement. exporting countries restrict amount of goods, importing countries receive less. Consumers have to pay a higher price for a good as domestic producers are less cost efficient.

The exporting country then can increase the price and gain more profits.

Eg. Between Japan and USAhuge competition between the efficient Japan car industry and less efficient US car industryUS set strict quotas to limit the Japanese market share Japan avoided the quota by imposing a VER, which eventually increased the prices of the goods to earn more profitsCaused many of the exporting countries’ companies to start a manufacturing plant in the US to avoid the VER

Diagram/Analysis

TRADE EMBARGO

Definition of trade embargo

A policy state initiates to prohibit trade with certain countries

Examples

•Australia enacted a trade embargo on Indonesia’s cattle in 2011•Hong Kong enacted a trade embargo on the Philippines consumer goods in 2010•US enacted a trade embargo on Cuba’s consumer goods, arms and money in 1960

EvaluationAdvantages Limitations

Raise the cost of trade and finance to the targeted nations

Embargo’s cost affects businesses whose trades are affected which can amount to sector-specific tax to finance foreign policy

Over time, target nation develop alternative supplies and markets at increased costAvailability of goods from other sources lessens impact of embargo, raises level of cooperation required, increase domestic political costs of maintaining controls. Preferable to impose embargoes on goods not readily obtainable in foreign markets

Blunt tool-Limited ability to focus economic pressure against particular groups in target society.-substantial inadvertent adverse impact on economy and non-targeted poulation groups-Embargos imposed on one sector of an economy will spill over other sectorsWhich affects international trade

•Before the embargo, A’s import demand equals to the total export supply at point F at Fig 1.•Price is P0 and A imports Q0

Q0

Sn – Export supply to embargoed country from non-embargoing countries

Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries

Quantity of embargoed goods

Price of embargoed goods

P0

P1

a

b c

Dm

•When countries decide to put an embargo on exports to A, part of the world export supply to A vanishes. •The export supply Se is removed by the embargo. The remaining export supply to A is only Sn.

Q0

Sn – Export supply to embargoed country from non-embargoing countries

Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries

Quantity of embargoed goods

Price of embargoed goods

P0

P1

a

b c

Dm

•A experienced goods scarcity as a result causing prices to rise from P0 to P1, as the free trade equilibrium shifts from F to the embargo equilibrium at E. •The new scarcity costs A the area (b+c)•Countries imposing the embargo also lose area (a) indicating a loss of surplus on exports•Meanwhile, countries not participating in the embargo gain area (b) on extra sales to A at a higher price•The world together therefore loses area (a+c)•In the embargoing countries, the embargo lowers the price below P0 , thus slightly helping consumers while hurting producers.•In A, some import competing producers benefit from the embargo while others are negatively affected to a large extent.

Q0

Sn – Export supply to embargoed country from non-embargoing countries

Sn + Se- World export supply to embargoed country from embargoing and non-embargoing countries

Quantity of embargoed goods

Price of embargoed goods

P0

P1

a

b c

Dm