1

It has been seen that international flows of goods & services are

beneficial for all countries involved It leads to higher efficiency

in the classical model based on technological differences and in neoclassical based on differences in technology and factor

endowments

Yet this view of benefits & increased efficiency to the society stands in sharp contrast to the varirty of views from different pressure groups blaming international economics, globalization, international trade flows for its adverse impact on

macroeconomic variables such as employment, wages,

environment, level of development, competition etc.
2

Tries to reason out to some extent the existence of such pressure groups

It analyses the consequences of imposing trade

restrictions/protection for production, consumption & international trade flows.

It means unrestricted flow of goods & services between countries

It requires complete absence of government intervention in international trade

It does not require removal of all duties on imports; but if duties are
imposed on imports, they should be exclusively for revenue & not for protection of home industries

Restriction placed on free movement of commodities across national borders with a view to safeguarding domestic industries constitute the policy of protection

Free trade means government of each trading country do not make any distinction between domestic & foreign commodities & so neither imposes additional burdens on the later, nor grants any special favours to the former

Protection implies discrimination against the foreign commodities

Optimum allocation of resources Maximization of world output Expansion of consumption possibilities beyond internal production possibilities for the trading countries Lower prices of goods & services Widen size of markets Encourages competition & prevents monopolistic tendencies

Results in economic dependence of a country on other countries for some essential commodities Results in lopsided economic development in a country May lead to dumping sale of a product in foreign market at a price which is lower than the selling price of the product at home May give rise to international monopolies

Infant industry argument an industry in its infancy requires protection till it acquires strength & maturity & is set to face fierce foreign competition

Diversification of industry argument it is necessary to diversify the

industrial base of a country for the attainment of national self

sufficiency & balance growth of the economy. This requires protection.

Employment argument Key industry argument .

Endless list of policy options available

i.

Mostly of the form:

Tariff
Specific a tax of certain amount for each unit of good imported Ad valorem a certain percentage of tax per unit of good imported

ii.

Quota Production subsidy Export subsidy NTBs: saniatry & phytosanitary requirements, standard

requirements

10

All these policy measures affect production, consumption & other related economic variables in different ways.

We illustrate the case of two such policy options:

imposition of tariff Imposition of quota

11

Tariff is the most common instrument of protection It is a tax or duty levied by the state on a commodity when it crosses the national boundary

Examples : import duty tax imposed on an imported commodity

12

Yes in as much it is a duty levied by the state on a commodity when it crosses the national boundary

But it is not a protective tariff they are levied by the state either to raise revenue or to raise the prices of the exported goods in the

market

13

8 effects: Protective effect (production effect)

Consumption effect
Revenue effect Redistribution effect Balance of payments effect Terms of trade effect Competitive effect Income effect

14

A tariff raises the domestic price of importables increase in domestic production of importables while the consumption of the same falls. The former is the production effect & the second is the consumption effect of tariff The increase in government revenue due to the tariff is the revenue effect The increase in price of importables as a result of imposition of the import duty lowers consumer surplus & raises producers surplus. This is redistribution effect

15

Imposition of import duty makes import expensive lowers imports improves the BOP of the country this is the BOP effect

Imposition of import duty leads to a movement of the terms of trade in favour of the tariff imposing country the terms of trade effect

Tariff imposed on a import to protect an infant industry enables the later to gain sufficient competitive strength to withstand foreign competition after sometime competitive effect of tariff

Imposition of import duty multiplier effect of a fall in imports on real national income of the country income effect

16

R
Price E J 1 5 U K 2 H 3 G F 4 C Dd }t Sw T Sd

P
P1 Po

Quantity

17

Dd domestic demand schedule for the commodity & Sd domestic supply schedule for the commodity. In autarky equilibrium occurs at E at which price of the commodity OP Let OPo be the world price of the commodity at which the foreign supply curve for the commodity facing the country is perfectly elastic. Under free trade domestic price of the commodity would also be OPo at which domestic consumption of the commodity is OB & domestic production is OM. Thus import of the commodity is KC Now suppose an import duty of t per unit is imposed rise in domestic price of the commodity from OPo to OP1 & shifts the foreign supply curve upward by the amount of the tariff t from the position PoSw to P1T increases domestic production by MN (production effect) & lowers domestic consumption by AB (consumption effect) Import falls from MB to NA trade effect
18

Tariff revenue collected by imposing this tariff = HJFG revenue effect of the tariff Under free trade consumer surplus is = P0RC but after tariff = P1RF. So consumer surplus falls by P0P1FC (=1+2+3+4). Producers surplus on the other hand increase from P0UK to P1UJ i.e. by area 1 in figure which is transferred from consumers to producers redistribution effect 1 goes to producers from consumers & 3 from consumers to the government. But 2 & 4 though lost by consumers do not go anywhere & represents the deadweight loss imposed by the tariff. Of this 2 represents the production cost & 4 the consumption cost of tariff

19

zero

20

One of the several instruments of protection Refers to the fixation of certain maximum limit beyond which the import of a commodity cannot go during a period of time

Limit may be fixed either in physical units or in value terms Is enforced through the licensing of imports

21

Refer to the same figure as for import tariff In the figure an import tax of t per unit (i.e. P0P1 per unit) on the quantity imported of the commodity is equivalent to an import quota equal to NA all effects are same

Only difference: in case of tariff govt. collects tariff revenue = 3 (=

HJFG) there will be no such revenue from the fixation of quotas.

Note: govt can raise same revenue by auctioning off import licences

22

23