Protectionizm

Protectionism and Trade Liberalisation

Trade and the Government
The Govt. has the ability to influence economic relations with the rest of the world (diversification and scale of trade).
There are two opposing ways in which they can achieve certain goals: protectionism and free trade.
Both are used for specific reasons with advantages for both.

Protectionism vs. Free Trade
Free Trade: when government put in place policies that allow producers from overseas nations to freely sell their goods in our country (promote trade).
Protectionism: when government put in place policies to stop overseas producers freely selling goods in our country (restrict trade).

Arguments for Protectionism
Infant Industry:
New or start up industries that
have not been operating for long
For: new industries are given the chance to develop systems and processes to get to the stage that they are able to compete against larger international producers (‘grow up’).
Against: there is no incentive for these industries to become more efficient whilst continuing to gain from the protection.

Protecting domestic employment:
While local businesses continue to operate they provide employment.
Governments will protect our domestic employment levels as this is seen as ‘desirable’ to gain political support (more jobs=more votes). While local businesses are operating they are providing employment locally.
‘Import substitution’ industries: industries that produce substitutions for imports.

National interest and security:
The government may see it is in our best interest to keep certain industries operating, in NZ. e.g Steel and oil production
E.g. keeping certain industries in NZ in order to maintain control of them, i.e. buying back $800 million in shares of Air NZ to prevent control shifting more so overseas.
E.g. Agricultural industry: in times of hardship with the agricultural industry being protected, this will enable us to feed our nation.

Cheap foreign labour:
Labour should be paid at a rate that recognises the level of productivity. If NZer’s get a higher wage this should be due to higher levels of productivity, education, or skill.
If this is not the case and the wage paid does not recognise the productivity of the worker, low wage paying countries have an unfair advantage of being able to produce low cost goods (therefore making our NZ made products less desirable).

Protectionism
Definition: Imposition of trade barriers in order to protect domestic producers
By definition, protectionism is a topic that involves politics as much as “pure” economics
But for the moment … let’s stick with economics

Types of Protectionism
Direct
Embargo
Tariff
Quota
Subsidy
Indirect
Voluntary Export Restraint (VER)
Exchange rate controls
Import licenses
Regulatory and administrative barriers

Embargo
A total ban on trade
Can be applied by domestic governments or imposed by foreign governments
Examples
Jefferson’s Embargo Act (1807)
U.S. embargo of Iraq post Gulf War
Often used as an economic weapon to achieve foreign policy objectives

Implications of an Embargo
Embargo = elimination of trade = pure domestic market
Prices go up (consumers pay more)
Domestic producers lose the opportunity to sell their products in foreign markets but benefit from higher prices for their goods domestically

Equilibrium Without Trade
Domestic
Supply
Domestic
Demand
Consumer
Surplus
Producer
Surplus
Pd
Qd

Impact of Trade
To understand the impact of trade, you must start with an analysis of relative prices and comparative advantage
If the domestic equilibrium price for a product is lower than the world price – the country will become an exporter of this product
If the domestic equilibrium price is higher than the world price – the country will import the product from foreign suppliers

Protectionism

Protectionism
Means by which trade between countries is restricted in some way – normally through measures to reduce the number of imports coming into
a country
Main means are:
Tariffs
Quotas
Non-Tariff Barriers

Protectionism
Tariff: A tax on a good
coming into a country
Increases the price of the good and makes it less competitive
Quota: Physical restriction
on the number of goods
coming into a country

Impact of a Tariff on Steel
Price of Steel
(US $ per kg)
Quantity of Steel Bought and
Sold from Abroad
S
D
20
S + Tariff
Amount of the tariff per unit
500
28
350

Impact of a Quota on Steel
Price of Steel
(US $ per Kg)
Quantity of Steel Bought and
Sold from Abroad
S
D
20
500
Pre-trade position before a quota.
Quota level
250
30
The quota restricts the supply to a set amount (250
in the example) which is likely
to result in a shortage of this good and
a subsequent rise in its price.

Non-Tariff Barriers
Any methods not covered by a tariff,
most usually:
Rules
Regulations
Voluntary Export Restraints (VERs)
Legislation
Exacting Standards or Specifications

Non-Tariff Barriers
Examples include setting exacting standards on fuel emissions from cars, the documentation required to be able to sell drugs in different countries, the ingredients
in products – some of which may be banned
in the destination country
NTBs are difficult to prove – when do you accuse a country of protectionism –
could be a legal or cultural issue?
The main method involved in NTBs is not
to prevent trade but to make the cost of doing so prohibitive to the potential exporter

Who Wins and Who Loses?
To simplify our analysis, assume that the world price is a given – the actions of our small, insignificant country have no impact on the prevailing world price
Graphically, this assumption is represented by a flat supply curve at the world price (i.e. we can import or export unlimited quantities at that price)

Impact on an Exporter
Domestic Supply
Domestic Demand
Exports
Consumer Surplus
Producer Surplus
World Price

Impact on an Exporter
When a country is an exporter, generally consumers lose (higher prices, reduction of consumer surplus)
But, domestic producers gain (higher prices and increased production)
Higher production translates into more jobs, happy constituents and reelected politicians
Domestic economy realizes a net benefit

Impact on an Importer
Domestic Supply
Domestic Demand
World Price
Consumer Surplus
Producer Surplus
Imports

Impact on an Importer
When a country is an importer, consumers benefit (lower prices and higher consumer surplus), but domestic producers lose (lower prices, decreased production)
Reductions in domestic production means job losses and often an increase in political rhetoric and calls for the government to protect domestic industries from foreign competition, despite the fact the overall economy realizes a net benefit from trade

Tariff
The most common restriction on trade is a tariff
Tariff = tax on imported goods
Results of a tariff:
Prices go up
Domestic production increases
Government gets more revenue

Effects of a Tariff
Domestic Supply
Domestic Demand
World Price
Price with Tariff
Qd1
Qd2
Qs2
Qs1
Imports

Quota
Another very common restriction on trade is the quota
A quota is a limitation on the quantity of a good allowed to be imported into a country
Quotas limit the impact of international trade on the domestic market
Usually enforced through government issued permits to trade

Quota (Cont’d)
Impact of quotas:
Domestic prices go up (consumers pay more)
Domestic producers increase production
Government gets more revenue (import license fees)
Let’s go to the graph …

Impact of a Quota
Domestic Demand
World Price
Domestic Supply
Supply with Import Quota
Quota
Q1
Q2
Q3

Subsidy
Government payment to producers in order to either reduce the impact of imports or make a country’s exports more competitive
First, let’s examine the impact of an import subsidy …

Import Subsidy
Domestic Supply with no subsidy
Domestic Supply with subsidy
World Price
Domestic Demand
Q1
Q2
Q3

Export Subsidy
An export subsidy enables domestic producers to lower their prices in the world market below their true cost of production, and otherwise known as dumping (and a definite WTO violation)
Export subsidies protect domestic producers from foreign competition and increase domestic production and employment – very tempting outcomes for governments
Which leads to predictable accusations and figure pointing during international trade negotiations

Indirect Protectionism
Voluntary Export Restrictions
Self-imposed export restrictions
Can be imposed on a firm upon itself, an industry upon itself, or by a domestic government over domestic producers
Negotiation tool to avoid trade wars and stay within WTO rules
Exchange Rate Controls
Limitation on amount of foreign currency available to importers

Indirect Protectionism (Cont’d)
Import Licensing
Government issued licenses required to import goods
In practice, works like a quota
Regulatory and Administrative Barriers
Regulations that increase the cost of production for imported goods
Can take the form of safety standards, environmental controls, terrorism laws

Arguments for Protectionism
Infant Industry Argument
In theory, used to provide “temporary” protection for domestic producers during their early stage of development in order to give them time to grow and develop economies of scale
Argument also used to justify protection for declining industries to give them time to restructure
In practice – “temporary” can be a very long time

Arguments for Protectionism (Cont’d)
The Exploitation Argument
Workers in developing countries are exploited by MNCs and domestic firms are forced to cut corners in order to compete
Activist groups push for restrictions (especially through regulation) by developed nations
Rebuttal – Workers in developing countries are relatively better off from trade; restrctions only make goods more expensive and force MNCs out of developing nations

Arguments for Protectionism (Cont’d)
The Jobs Argument
Trade destroys domestic jobs
Rebuttal – Depends on which jobs you are talking (or care) about; trade costs some jobs and creates others; any attempt to protect domestic employment will create inefficiency and reduce long-term competitiveness

Arguments for Protectionism (Cont’d)
National Security Argument
We must protect industries that are “vital to our national security”
Trade makes us more vulnerable to terrorism
Rebuttal – “Vital to national security” is very broad, tough to define, and often in the eye of the beholder; trade creates economic interdependency that builds political bridges and mutual interests

Arguments for Protectionism (Cont’d)
Unfair Competition Argument
The “they don’t play fair” argument
Foreign governments subsidize exports
We face a tougher regulatory environment
They are dumping products in our market
Rebuttal – Very slippery slope; we should lead by example; a shift toward protectionist policies will hurt everyone

And Finally …
Bargaining Chip Argument
Protectionism as a tool of foreign policy
Use threat of trade restrictions as a bargaining chip to get concessions from our trading partners
Rebuttal – Using trade as a political weapon has the potential to snowball with very negative consequences, so if (when) we employ this tactic – it better work

Reasons
Protect domestic industries
Protect domestic employment
Strategic reasons
Political pressures
Protect culture?
Prevent ‘Dumping’ – selling goods in the destination country below cost
to break into that market

Trade Liberalisation

Trade Liberalisation
Aims to free up world trade
and break down the barriers to international trade
Basic philosophy rests on the principle of comparative advantage
Talks to achieve trade liberalisation have been ongoing for many years

Trade Liberalisation
GATT – General Agreement on Tariffs
and Trade
First signed in 1947 –
talks on-going since then!
Uruguay Round 1994 – set up the World Trade Organisation (WTO) as well as agreements covering a range of trade liberalisation measures
WTO provides the forum through which trade issues can be negotiated and works to help implement and police trade agreements

Trade Liberalisation
Potential benefits:
Promotes international specialisation
and increases world output
Promotes efficient use and allocation
of world resources
Allows developing countries access to the heavily protected markets of the developed world thus helping promote development
Facilitates the working of the international market system and the working of price signals to ensure efficient allocation
of resources, international competition
and the associated benefits to all

WTO (World Trade Organisation)
The only global international organisation dealing with the rules of trade between nations.
Their goal is to help producers of goods and services, exporters and importers conduct their business through:
Negotiating agreements between member countries/nations aimed at reducing or eliminating obstacles to international trade (tariffs, rules and regulations, etc).
Monitoring the agreements, ensuring member countries are adhering to the agreements.
Settling disputes among members (in terms of the interpretation of the agreements).

FACT FILE
Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 153 countries on 23 July 2008
Budget: 196 million Swiss francs for 2011
Secretariat staff: 640
Head: Pascal Lamy (Director-General)
Functions:
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations

CER
Closer Economic Relations
NZ’s Closer Economic Relations (1983) agreement with Australia is our most important bilateral trade agreement
Giving NZ producers a huge advantage of non-restrictive access to the large Australian markets (selling), or their goods (buying).

CER
Main aim: break down trade barriers.
No tariffs or quotas placed on imports (free trade on goods and services)
Follows WTO rules.
Mutual recognition of goods and occupations (goods legal in both countries, skills/education recognised in both countries).
Free labour market (residents of both countries can freely visit, reside, and work in either country).

EU (European Union)
Free trade between union countries and a common external trade policy for non-members.
Member Nations: (28) Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom

European Union
Common Agriculture Policy (CAP)
A system of European Union Subsidies and guarantees of high prices to farmers. This includes implementing the following on certain goods
Tariffs
Minimum Prices
Quotas
One of NZ’s priorities is to encourage further reform of the CAP.
When Britain entered into the EU (in 1972), this created change for NZ. We used to be able to export a large percentage of our agricultural products to the countries in the EU.
Now Britain has increased their agricultural imports from inside the Union and NZ has increased their exports towards the Asia-Pacific Region

APEC
Member Nations include:
Argentina, Australia, Bolivia, Brazil, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Thailand, US, Vietnam, NZ.

APEC (Asia-Pacific Economic Cooperation)
Formed in 1989. APEC member nations work together to sustain economic growth via committing themselves to free trade, investment and economic reform.
Reducing tariffs and other barriers has meant APEC member nations have become more efficient and export levels have largely increased.
Standard of living has increased in these countries as a result of cheaper goods and services being available to consumers.

Exchange Rate Policies
Fixed Exchange Rates
An exchange rate whose value is set by the official government policy.
Floating / Flexible Exchange Rates
An exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign market.

Exchange rate policies
Fixed vs. floating exchange rate.
NZ changed from having a fixed exchange rate to a floating exchange rate in 1985.
The government (as part of the fixed exchange rate policy) would buy and sell currencies to manipulate the price of the $NZ (i.e. exchange rate).
Now as part of the Monetary Policy (aim of price stability by manipulating the OCR), the exchange rate is still influenced even though this isn’t being targeted.

RBNZ increases the OCR
Interest rates increase
Encourages Foreign investment into NZ
Demand for $NZ increases (they must invest in NZ banks in NZ currency).
$NZ appreciates

New Zealand Trade Policy
As a developing country, NZ has pursued the policy of free trade over the past 25 years.
The aim of this is to promote trade between NZ and the rest of the world and having efficient producers competing in international markets in their competitive advantage production.
We have progressively removed barriers to trade (tariffs, quotas, etc), although not completely (e.g. tariffs on some clothing and footwear still exist).
Micro-economic policies also put in place to increase our efficiency of producers
e.g. electricity market reform- targeting reduced energy costs