PROTECTIONISM

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PROTECTIONISM

• BY
• MARVELOUS INTERNATIONAL
• ECONOMICS STUDENTS

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Producers Surplus

• Defined as the difference between the price that
  the sellers would have required to part with the
  product, and the market price that they actually
  receive.
• -- the greater the market price obtained (due to
  tariff imposition), the
  greater the producers surplus.

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Consumers Surplus

• Consumers surplus is the difference between what
  consumers would have been willing to pay and the
  market price that they actually pay.

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Infant Industry

• Asserts that industries that may benefit from
  large-scale operations because of the existence
  of external economies (such as good transport
  facilities, a well-trained labor force, or the
  learning by doing effect) should be allowed to
  grow to optimum size under a protective tariff.

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Nominal Tariff Rate

• The tariff rate published in the countrys tariff
  schedule that does not convey the level of
  protection accorded to the domestic producers.
• Applies to the total value of imports, but only
  protects the portion of the value produced at
  home.

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HOW ECONOMISTS DEFINE COUNTRIES

• LARGE COUNTRIES-
• A COUNTRY THAT CAN, BY ITS OWN ACTION, AFFECT
  WORLD MARKET PRICES (THE UNITED STATES IS ONE
  OF A HANDFUL OF COUNTRIES)
• SMALL COUNTRIES-
• A COUNTRY THAT CANNOT, BY ITS OWN ACTION,
  AFFECT WORLD MARKET PRICES AND HENCE IN TERMS OF
  TRADE

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European Union and Economic Community

• Regional grouping that includes 15 West European
  countries. Head quartered in Brussels, Belgium,
  it used to be called the Economic Community or
  Common Market
• Trade among members is free of restrictions non
  members must pay the common external
  tariff----larger market and greater competition
• EMU (European Monetary Union) Dec. 1991 EU
  countries signed a treaty on monetary and
  political union in Maastricht common social and
  labor policies, coordinated defense and foreign
  policies , transfer of power from national
  governments.

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Terms of Trade

• Defined as export price divided by import price
  (Px/Pm)
• What one country gains, another loses
• Example
• If a countrys import price declines and an
  export price remains the same, then that
  countrys terms of trade have improved or
  increased.
• Keely Collins

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Terms of Trade

• Defined as export price divided by import price
  (Px/Pm)
• What one country gains, another loses
• Example
• If a countrys import price declines and an
  export price remains the same, then that
  countrys terms of trade have improved or
  increased.
• Keely Collins

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What is Ad Valorem?

• The ad valorem tax is a fixed percentage of the
  value of the commodity, as when imported cars are
  taxed at 5 percent of value.
• The US uses both specific and ad valorem duties
  in roughly equal proportion Europe relies mainly
  on ad valorem taxes.

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Advantages of ad valorem

• Is more equitable than the others because it
  distinguishes fine gradations of the commodity as
  they are reflected in its price.
• Provides more constant level of protection to
  domestic industry in times of inflation.

• Good to use the ad valorem duty for goods with a
  wide range of grade variations.

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Ad Valorem and Specific Duty

• Whenever specific duties are employed they must
  be converted into their Ad Valorem equivalent.
• This is done in order to facilitate international
  or intercommodity comparisons.

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The Large Country Case

• Benefits on Tariffs
• Disadvantages
• Small Countries
• Conclusions

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Benefits on Tariffs

• When a large country imports a large amount of a
  commodity and imposes a tariff the world price of
  the commodity will drop.
• The large country receives an income for doing
  absolutely nothing

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Disadvantages

• The Exporting (Small) Country loses revenues from
  the drop of the world price
• The people from the large country pays more for
  the commodity

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Small Countries

• If the Small Country controls a large sector of
  the commodity they can control price as well.
• Small Country imposes export tariffs.
• Price of commodity goes up.

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Who pays and what is an Effective Tariff?

• It is customary to think that the coast of the
  tariff is paid by the importer when a commodity
  enters the country and is then passed on to the
  consumer as a price increase.
• Because this is an administrative procedures,
  there is a natural tendency to conclude that the
  tariff is paid by the citizens of the country
  imposing it. Often this is not true.
• This is defined by the terms of trade in each
  country, generally the equation is
• Export price divided by it import price.

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Deadweight LossDomestic Effects of the Tariff

• Tariff raises the domestic price of a product.
• This causes the consumer surplus to decline and
  the producers surplus to rise.
• Consumers surplus The difference between what
  consumers would have been willing to pay, and the
  market price they actually pay.
• Producers surplus The difference between the
  price that sellers would have required to part
  with the product, and the market price they
  actually receive.
• The net welfare loss from the tariff is therefore
  equal to the sum of the areas of the two welfare
  triangles. This is known as the deadweight loss.
• Jessica Hinojosa

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Conclusion

• If the trend continues trade disputes occur.

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F.O.B Price

• Free On Board The price of the commodity on
  board ship at the port of embarkation.
• If shiploading costs are excluded, one can obtain
  the F.A.S. or free alongside price.
• United States uses F.O.B. for computing their
  tariffs.

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C.I.F Price

• Cost, Insurance, and Freight Covers the cost of
  the commodity up to the port of entry.
• It includes ocean freight and other intercountry
  transportation costs, which F.O.B. price
  excludes.
• Most European countries employ the C.I.F. value
  for their tariffs.

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What does it mean?

• The U.S. takes the F.O.B price and takes a
  percentage of that price to compute their tariff.
  Since they dont take into account
  transportation coststheir tariffs are lower.

• European countries take into account all costs
  incurred during transport, then take a percentage
  of that which leads to a higher tariffs and an
  implicit form of protectionism.