Key Concepts

• Protectionism: national economic policies that restrict

free trade, usu. intended to raise revenue or protect
domestic industries from foreign competition.
• Government intervention arises in various forms:
– Tariff -- a tax on imports (e.g., citrus, textiles)
– Nontariff trade barrier -- government policy,
regulation, or procedure that impedes trade
– Quota -- quantitative restriction on imports of a
specific product (e.g., imports of Japanese cars)
– Investment barriers – rules or laws that hinder FDI
(e.g., Mexico’s restrictions in its oil industry)

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 Example of Protectionism: U.S. Steel Industry
• Bush administration imposed tariffs on imports of
foreign steel to protect U.S. steel manufacturers from
foreign competition, aiming to give the U.S. steel
industry time to restructure and revive itself.
• Resulting higher steel costs:
– increased production costs for firms that use steel, such as
Ford, Whirlpool and General Electric
– reduced prospects for selling products in world markets
– made U.S. steel firms less competitive
• The steel tariffs were removed within two years.

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 Example of Protectionism: Auto Industry
• In 1980s, the U.S. government imposed
‘voluntary’ export restraints (quotas) on imports
of cars from Japan, to insulate U.S. auto industry.
• Result 1: Detroit automakers had less of an
incentive to improve quality, design, and overall
product appeal.
• Result 2: Detroit’s ability to compete in the global
auto industry was weakened.

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 Consequences of Protectionism
• Reduced supply of goods to buyers
• Price inflation
• Reduced variety, fewer choices available to
buyers
• Reduced industrial competitiveness
• Various adverse unintended consequences
(e.g., while the U.S. dithers, other countries
can race ahead)

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 Tariffs are Widespread

• Developing economies -- tariffs are common.

• Advanced economies -- tariffs still a factor mainly in
textiles, clothing, and agricultural products (e.g., the U.S.
recently collected more tariff revenue on shoes than on
cars; $1.63 billion vs. $1.60 billion in 2001).
• The European Union applies tariffs of up to 236 percent
on meat, 180 percent on cereals, and 17 percent on
tennis shoes.
• United Nations estimates that trade barriers in general
cost developing economies over $100 billion in lost
trading opportunities with developed countries every
year.
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 WTO: A Force for Reducing Tariffs

• Governments have tended to reduce tariffs over

time.
• Tariff reduction was the primary goal of the General
Agreement on Tariffs and Trade (GATT)
• In 1995, the GATT became the World Trade
Organization (WTO).
• Countries as diverse as Chile, Hungary, Turkey, and
South Korea have liberalized their previously
protected markets, lowering trade barriers.

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 Investment Barriers
FDI and ownership restrictions are common in industries
such as broadcasting, utilities, air transportation, military
technology, and financial services, oil, fisheries, etc.

Examples-
• Canada – government restricts foreign ownership of local
movie studios and TV shows to protect its indigenous film and
TV industry from excessive foreign influence.
• Mexico – government restricts FDI by foreign investors to
protect its oil industry.
• Services sector – FDI and ownership restrictions are
burdensome because services usually cannot be exported;
must establish physical presence in the market

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 Currency Controls

• Restricts the outflow of hard currencies (such as the

U.S. dollar, the euro, and the yen), and occasionally
the inflow of foreign currencies.
• Repatriation of profits – restrictions on revenue
transfer from profitable operations back to the home
country.
• Used to conserve valuable hard currency, reduce
capital flight; particularly common in developing
countries.

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 Subsidies

• Government grants (monetary or other

resources) to firms or industries, intended to
ensure their survival by facilitating production at
reduced prices, or encouraging exports.
• Examples: cash disbursements, material inputs,
services, tax breaks, provision of infrastructure,
government contracts at inflated prices.
• For example, in France the government provides
large subsidies to Air France, the national airline.

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 Examples of Subsidies
• China- Firms such as China Minmetals ($12 b. annual sales)
and Shanghai Automotive ($12 b. annual sales), are in fact
state enterprises partly owned by the Chinese government,
receiving huge financial resources.
• In Europe and the U.S., governments provide agricultural
subsidies to supplement the income of farmers and help
manage the supply of agricultural commodities.
• In Europe, the Common Agricultural Policy (CAP) is a system
of subsidies that represents about 40 percent of the European
Union's budget, amounting to billions of euros annually.
• The U.S. government grants subsidies for such commodities as
wheat, barley, cotton, milk, rice, peanuts, sugar, tobacco, and
soybeans.

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 Investment Incentives

• Similar to subsidies, transfer payments or tax

concessions made directly to individual foreign firms
to entice them to invest in the country.
Examples
• Hong Kong government put up most of the cash –
$1.74 billion – to build Hong Kong Disneyland.
• Austin, TX and Albany, NY competed to have
Samsung Electronics build a semiconductor plant in
their regions. Austin won, offering $225m in tax relief
and other concessions to attract the $300m plant;
employs 1,000 workers.
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 Are Foreign Producers
Dumping Their Products?
• A firm is dumping when the price it charges in a foreign
market is either lower than the price it charges in its home
market or lower than its production cost.
• Dumping is illegal under international trade agreements;
hundreds of cases of alleged dumping are presented to WTO
authorities each year.

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