Sunday, January 27, 2013

Free Trade
It refers to the free flow of goods and services between countries without any kind of trade restrictions.

It refers to the imposition of trade restrictions on imports by law.

Reasons for Protectionism
1. It raises revenue for the government
2. It protects domestic infant industries
3. It reduces balance of payments deficit
4. It protects strategic industries
5. It prevents dumping
6. It promotes and secures employment at home
7. It leads to reallocation of resources in favour of the country
8. It prevents unfair competition from low-wage countries
9. It prevents the import of harmful goods

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Methods of Protectionism

1. Traditional Barriers to Trade

A) Tariff

It refers to a tax levied on imports. Tariffs are of two kinds.

a) Advalorem Tariff
It is a percentage of the monetary value of imports. For example, 02% of the total value of rice imported.

b) Specific Tariff
It is a tax per unit of goods imported. Fore example, Rf. 100 per each Television set imported.

Why do countries impose Tariff?
1. To protect domestic industries from foreign competition
2. To maintain a local product base
3. To prevent job loses
4. To assist the balance of payments of the country
5. To raise revenue for the government

Economic Effects of Imposing Tariff
1. It raises price of imports
2. It reduces the demand for imports
3. It increases demand for home-made substitutes
4. It raises revenue for the government
5. It reduces foreign competition

From the apposite diagram, it can be deduced that;
  • Domestic supply is less than domestic demand. So, we import (JM amount of) goods from abroad.
  • Imposition of tariff shifts World Supply from WS to WS1. It increases the price from OP to OP1.
  • Increase in price reduces quantity demanded from OM to OL. At the same time, Domestic Supply increases by JK amount.
  • As a result Import falls by LM. Now, only KL quantity is imported.
  • ABCD in the revenue from tariff for the government.
B) Quota
Quota refers to a physical limit on the actual quantity of an import allowed into a country.

Economic Effects of Imposing Quota
1. It reduces the volume of import
2. It raises the price of import
3. It promotes demand for home-made substitutes
4. It reduces foreign competition and protects domestic industries

C) Exchange Control / Currency Restrictions
Currency Restrictions prevent domestic residents acquiring sufficient foreign currency to pay for imports.

D) Production Subsidies
It refers to the government assistance given to domestic producers to boost domestic production and to enable them to face foreign competition. Subsidies are of two forms.

1. Financial Subsidies
2. Material Subsidies

Economic Effects of Providing Subsidies
1. It reduces cost of production
2. It increases domestic supply
3. It reduces the prices of domestic products
4. It reduces foreign competition

Note that the cost of subsidizing domestic production would be met by taxation. Thus, the cost of subsidy falls on tax payers.

E) Embargoes
It refers to a complete ban on imports. These are usually imposed for political reasons.

2. Modern Barriers to Trade
These are modern techniques of protection followed by some countries to restrict imports. It includes;

1. Import Deposit Scheme (IDS)
2. Voluntary Export Restraint (VER)
3. Product Standard Regulations (PSR)
4. Complex Customs Procedures (CCP)
5. Government Contracting Policy (GCP)
6. Campaigns (TV, Radio, Newspapers etc)
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