In what way can trade restrictions protect labour markets

Trade protectionism

Trade protection is the deliberate attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favour of free trade and increasing trade openness, protectionism is still widely practiced.

The motives for protection

The main arguments for protection are:

Protect sunrise industries

Barriers to trade can be used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive.

Protection of domestic industries may allow they to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

Protect sunset industries

At the other end of scale are sunset industries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. For the UK, each generation throws up its own declining industries, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.

Protect strategic industries

Barriers may also be erected to protect strategic industries, such as energy, water, steel, armaments, and food. The implicit aim of the EUs Common Agricultural Policy is to create food security for Europe by protecting its agricultural sector.

Protect non-renewable resources

Non-renewable resources, including oil, are regarded as a special case where the normal rules of free trade are often abandoned. For countries aiming to rely on oil exports lasting into the long term, such as the oil-rich Middle Eastern economies, limiting output in the short term through production quotas is one method employed to conserve resources.

Deter unfair competition

Barriers may be erected to deter unfair competition, such as dumping by foreign firms at prices below cost.

Save jobs

Protecting an industry may, in the short run, protect jobs, though in the long run it is unlikely that jobs can be protected indefinitely.

Help the environment

Some countries may protect themselves from trade to help limit damage to their environment, such as that arising from CO₂ emissions caused by increased production and transportation.

Limit over-specialisation

Many economists point to the dangers of over-specialisation, which might occur as a result of taking the theory of comparative advantage to its extreme. Retaining some self-sufficiency is seen as a sensible economic strategy given the risks of global downturns, and an over-reliance on international trade.

In addition to the economic arguments for protection, some protection may be for political reasons.

For methods of protection, see tariffs and quotas

Trade Restrictions

Written by Clayton Reeves for Gaebler Ventures

Find out the truth behind trade restrictions aimed to help our farmers and workers. We discuss trade policy and how trade restrictions impact small business owners.

Everyone has heard about how trade restrictions help certain industries keep the upper hand over foreign competitors.

It is important, as a small business owner to understand the implications of trade restrictions on your business.

What does it mean to you, your foreign competitors and your consumers? These are three questions you will have to ask when determining whether or not you can compete on a global scale.

The United States generally does not protect industries that entrepreneurs may be headed into, but other countries will protect their infant industries so that clever entrepreneurs, like you, cannot take advantage of their countries. While this theory is based in antiquity, it is certainly prevalent in many countries today. That is why it is important to know about a couple basic trade restrictions, and how they affect the consumers domestic producers and foreign producers.

Quota

Quotas limit the amount of a product that can be imported into a country. This has several effects on the market place. First, it can create intense competition between foreign producers to become one of the providers for the domestic market. This can be done through competition or even political agenda. Either way, some foreign producers who may have superior product may be blocked out of the domestic market. This hurts domestic consumers.

The law of supply and demand makes it clear that if the supply of an item is restricted, and demand stays constant, then price will rise. This hurts domestic consumers but helps domestic producers. Since some foreign producers are blocked from importing into the domestic country, it also hurts their chances of selling their product. Domestic producers can raise their prices because of the restricted supply and constant demand. Quotas protect domestic producers.

Tariff

Tariffs are easy to remember because they are basically a tax. Just think, tax = tariff. They are basically the same thing. When a good is imported into a country, it goes through customs. At this point, the government can levy fees and taxes on the goods. Generally, they are a percentage of the value of the good or a per item unit tax.

This is what tariffs do to the domestic market. They raise the price of the goods coming into the domestic country and hurt domestic consumers. As a result, it hurt foreign producers because it makes their products more expensive. The only party that a tariff helps is the domestic producer of the product.

Of course, the government also receives a marginal benefit from the tariff revenue generated by the tariffs. Tariffs are one way to help protect a domestic industry. Tariffs always hurt domestic consumers.

Basically, both of these restrictions on trade hurt domestic consumers and help domestic producers. These are ways for the government to protect industry. Take, for example, the sugar industry. If lobbyists in the capitol didn’t constantly badger the government to maintain the restrictions on sugar imports, then sugar in this country would cost a fraction of what it does not. This is simply an example of the government protecting a domestic industry.

All of these things hurt the economy as a whole.

When he’s not playing racquetball or studying for a class, Clayton Reeves enjoys writing articles about entrepreneurship. He is currently an MBA student at the University of Missouri with a concentration in Economics and Finance.

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What Is Trade Protectionism?

Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.

Trade protectionism is a policy that protects domestic industries from unfair foreign competition. The four primary tools used in trade protectionism are tariffs, subsidies, quotas, and currency manipulation.

Definition and Examples of Trade Protectionism

Trade protectionism is a measured and purposeful policy by a nation to control imports while promoting exports. It is done in an effort to promote the economy of the nation above all other economies.

For example, if a U.S. manufacturer produced goods domestically that were more expensive than foreign imports, the government might enact tariffs, or import taxes, that boost the price of the foreign-made products. The effect would be make the U.S.-made goods more competitive on price.

How Trade Protectionism Works

The most common protectionist strategy is to enact tariffs that tax imports. That immediately raises the price of imported goods. They become less competitive when compared to locally-produced goods. This method works best for countries with a lot of imports, such as the U.S.

The chart below shows the share of tariffs collected on U.S. imports since 1790. Tariffs hit a record 57.3% in 1830 due to the Tariff of Abominations. They hit a record low in 2008 at 1.2%.

Protectionism fell out of favor after the Smoot-Hawley Tariff of 1930. It was designed to protect farmers from agricultural imports from Europe. U.S. farmers were already suffering from the Dust Bowl and European farmers were ramping up production after the destruction of World War I. But Congress added many other tariffs. Other countries retaliated. The resultant trade war restricted global trade. It was one reason for the extended severity of the Great Depression.

The Use of Subsidies

Governments also frequently subsidize local industries to help them compete in the global market. Subsidies come in the form of tax credits or direct payments. Some of the most commonly used subsidies are granted to farms, which allows farmers to lower the price of the food they produce. In turn, these subsidies make the products affordable for the consumer while still allowing the producer to turn a profit.

There are instances when subsidies can cause problems. For instance, the Agricultural Adjustment Act of 1933 allowed the government to pay farmers not to grow crops or livestock. The government wanted to control supply and increase prices. The act also enabled farmers the chance to let their fields rest and regain nutrients due to overproduction. In this case, the subsidies helped the agriculture industry but raised food costs during the Depression and hurt consumers.

Using Import Quotas and Currency Manipulation

A third method is to impose quotas on imported goods. This method is more effective than the first two. No matter how low a foreign country sets the price through subsidies, it can’t ship more goods.

Currency manipulation is a deliberate attempt by a country to lower the value of its currency. While it can make exports cheaper and more competitive in the short term, currency manipulation can also result in retaliation by other countries and start a currency war. One way countries can lower their currency’s value is through a fixed exchange rate.

Another way to manipulate currency is by creating so much national debt that the currency becomes less valuable.

Advantages and Disadvantages of Trade Protectionism

Protects a country’s new industries from foreign competition

Temporarily creates jobs

Companies without competition decline in quality

Protectionism

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

What Is Protectionism?

Protectionism refers to government policies that restrict international trade to help domestic industries. Protectionist policies are usually implemented with the goal to improve economic activity within a domestic economy but can also be implemented for safety or quality concerns.

Key Takeaways

Protectionism

Understanding Protectionism

Protectionist policies are typically focused on imports but may also involve other aspects of international trade such as product standards and government subsidies. The merits of protectionism are the subject of fierce debate.

Critics argue that over the long term, protectionism often hurts the people and entities it is intended to protect by slowing economic growth and increasing price inflation, making free trade a better alternative. Proponents of protectionism argue that the policies can help to create domestic jobs, increase gross domestic product (GDP), and make a domestic economy more competitive globally.

Types of Protectionist Tools

Tariffs

Import tariffs are one of the top tools a government uses when seeking to enact protectionist policies. There are three main import tariff concepts that can be theorized for protective measures. In general, all forms of import tariffs are charged to the importing country and documented at government customs. Import tariffs raise the price of imports for a country.

Scientific tariffs are import tariffs imposed on an item-by-item basis, raising the price of goods for the importer and passing on higher prices to the end buyer. Peril point import tariffs are focused on a specific industry.

These tariffs involve the calculation of the levels at which point tariff decreases or increases would cause significant harm to an industry overall, potentially leading to the jeopardy of closure due to an inability to compete. Retaliatory tariffs are tariffs enacted primarily as a response to excessive duties being charged by trading partners.

Import Quotas

Import quotas are nontariff barriers that are put in place to limit the number of products that can be imported over a set period of time. The purpose of quotas is to limit the supply of specified products provided by an exporter to an importer. This is typically a less drastic action that has a marginal effect on prices and leads to higher demand for domestic businesses to cover the shortfall.

Quotas may also be put in place to prevent dumping, which occurs when foreign producers export products at prices lower than production costs. An embargo, in which the importation of designated products is completely prohibited, is the most severe type of quota.

Product Standards

Product safety and low-quality products or materials are typically top concerns when enacting product standards. Product standard protectionism can be a barrier that limits imports based on a country’s internal controls.

Some countries may have lower regulatory standards in the areas of food preparation, intellectual property enforcement, or materials production. This can lead to a product standard requirement or a blockage of certain imports due to regulatory enforcement. Overall, restricting imports through the implementation of product standards can often lead to a higher volume of production domestically.

For one example, consider French cheeses made with raw instead of pasteurized milk, which must be aged at least 60 days prior to being imported to the U.S. Because the process for producing many French kinds of cheese often involves aging of 50 days or fewer, some of the most popular French cheeses are banned from the U.S., providing an advantage for U.S. producers.

Government Subsidies

Government subsidies can come in various forms. Generally, they may be direct or indirect. Direct subsidies provide businesses with cash payments. Indirect subsidies come in the form of special savings such as interest-free loans and tax breaks.

When exploring subsidies, government officials may choose to provide direct or indirect subsidies in the areas of production, employment, tax, property, and more.

When seeking to boost a country’s balance of trade, a country might also choose to offer subsidies to businesses for exports. Export subsidies provide an incentive for domestic businesses to expand globally by increasing their exports internationally.

What Are Examples of Protectionism?

Common examples of protectionism, or tools that are used to implement a policy of protectionism include tariffs, quotas, and subsidies. All of these tools are meant to promote domestic companies by making foreign goods more expensive or scarce.

Is Protectionism Left-Wing or Right-Wing Politics?

Traditionally, protectionism is a left-wing policy. Right-wing politics generally support free trade, which is the opposite of a protectionist stance. Left-wing politics support economic populism, of which protectionism is a part.

What Are the Arguments for Protectionism?

Lawmakers that favor protectionist trade policies believe that they protect jobs at home, help support and grow small companies and industries, and provide a layer of security to the nation.

In what way can trade restrictions protect labour markets

This week we will look at all the different ways countries block trade. Some are more obvious than others, such as tariffs, quotas, and embargoes. However some ways, such as subsidies and standards, are more subtle. However they too block competition, allowing Americans companies to flourish without lowering prices or competing with foreign producers. Blocking trade is a tricky business, and governments use a variety of tactics to keep foreign goods out of their countries.

Different Types of Trade Restrictions

As David Ricardo taught us, w hen nations specialize and trade total world output is increased. Companies produce for foreign markets as well as domestic markets (markets in the home country). Exports are the goods and services sold in foreign markets. Imports are goods or services bought from foreign producers.

In spite of the benefits of international trade, many nations put limits on trade for various reasons. The main types of trade restrictions are tariffs, quotas, embargoes, licensing requirements, standards, and subsidies.

A tariff is a tax put on goods imported from abroad. The effect of a tariff is to raise the price of the imported product. It helps domestic producers of similar products to sell them at higher prices. The money received from the tariff is collected by the domestic government.

There are two types of tariffs: protective and revenue tariffs. Protective tariffs are put in place specifically to make foreign good more expensive to protect domestic industries from competition. Revenue tariffs are put in place to raise money for the government. It all depends on the intention of the government that implements the tariff. Oftentimes any tariff will end up accomplishing both goals at once (at the expense of the domestic consumer and the foreign business).

A quota is a limit on the amount of goods that can be imported. Putting a quota on a good creates a shortage, which causes the price of the good to rise and allows domestic producers to raise their prices and to expand their production. A quota on shoes, for example, might limit foreign-made shoes to 10,000,000 pairs a year. If Americans buy 200,000,000 pairs of shoes each year, this would leave most of the market to American producers.

An embargo stops exports or imports of a product or group of products to or from another country. Sometimes all trade with a country is stopped, usually for political reasons.

Some countries require import or export licenses. When domestic importers of foreign goods are required to get licenses, imports can be restricted by not issuing many licenses. Export licenses have been used to restrict trade with certain countries or to keep domestic prices on agricultural products from rising.

Standards are laws or regulations that nations use to restrict imports. Sometimes nations establish health and safety standards for imported goods that are higher than those for goods produced domestically. These have become a major form of trade restriction and are used in different amounts by many countries.

Subsidies can be thought of as tariffs in reverse. Instead of taxing the foreign import, the government gives grants of money to domestic producers to encourage exports. Those who receive such subsidies can use them to pay production costs and can charge less for their goods than foreign producers. A tariff is paid for by the buyers of the foreign goods and the buyers of domestic goods who pay higher prices. But subsidies are paid for by taxpayers who may or may not use the good.

Here is an article from The Economist criticizing our current subsidy system: http://www.economist.com/node/7887994

Agricultural subsidies also lead to the overproduction of corn, and therefore the widespread use of cheap corn syrup in most of the foods we eat. As Michael Pollan points out, this is not healthy: http://michaelpollan.com/articles-archive/you-are-what-you-grow/

So why do we block trade?
Well there are many reasons, namely:
1) To halt unemployment in America. American businesses must lay off workers if their goods can’t compete with cheaper foreign goods.
2) To protect «crucial» domestic industries. Protectionists (people against free trade) argue that entire industries, such as oil, steel, cars, etc. are vital to the economy of the USA, and therefore must be protected from foreign competition.
3) To protect new «infant» industries in America. If these companies are shielded from competition for a while, they can grow strong enough to compete in the world market.

However, all three of these reasons are simply about giving America an advantage in industries where America should not have one. In other words, blocking free trade is the same as blocking the free market, and Adam Smith would not approve! Instead of improving lower-quality American goods, protectionists try to shield them from competition. Instead of allowing American consumers to purchase reasonably priced foreign cars, protectionists want to make them more expensive (so you’ll buy American). Instead of drilling oil, mining precious metals, or building snowmobiles in countries that have a comparative advantage for doing all those things, protectionists want to keep all those industries in America, even if that means higher prices for American consumers. Here is an article that discusses what it would be like if America was embargoed by another country:
http://www.hoover.org/publications/hoover-digest/article/7311
Often times people blame our education system for why companies are moving their jobs overseas, however it has a lot more to do with wages and costs than it does with training. Just as David Ricardo explained two centuries ago, if a country can make a good cheaper than us, they will get the business and we won’t. Here’s an article that explains this concept in modern times:

However, there is a fourth reason to block free trade that has nothing to do with competition or prices:
4) To isolate and punish totalitarian governments and regimes that support terrorism, genocide, nuclear weapons programs, or (in some cases) Communism. America purposefully cuts off trade with certain nations (e.g. Cuba, Iran, North Korea) in an effort to force those nations’ governments to change their ways. Here is a list of nations with whom America is currently restricting trade:
http://en.wikipedia.org/wiki/United_States_embargoes

However even this type of embargo rarely accomplishes the intended goal. Cuba is still Communist almost 50 years after we began blocking trade with them. North Korea and Iran ignore our embargoes and continue on with their nuclear weapons programs. In fact, trade embargoes generally hurt the exact people we are trying to help, by cutting off the citizens of these nations from much-needed food, medicine, and goods necessary for survival. Only free trade can help prevent starvation in North Korea; an embargo will only make things worse.

Speaking of North Korea, here is a mind-blowing look inside the real North Korea, created by undercover journalist Lisa Ling:
http://www.youtube.com/watch?v=mxLBywKrTf4

1) Do you believe North Korea is a 3rd world country? Why or why not?

2) What can we do to improve relations with North Korea?

Though we will continue to discuss trade this week in class, you will be reading about third world countries for homework (which we will discuss next week in detail).

1) What are all the different types of trade restrictions? How does each one work? Any examples?

2) After participating in the free trade debate, what is your conclusion about free trade and protectionism? How much (or how little) should our government regulate trade? Why?

3) Logic puzzle: How could Adam Smith’s division of labor theory be used as another argument for free trade? Hint: this theory doesn’t only apply to factories.

4) What are your thoughts on our food production system in America today (subsidies, health, treatment of animals, environmental concerns, etc.)? Are you alarmed by any part of it? What could be done to improve this system?