Protectionism Pre-test
60 important questions on Protectionism Pre-test
When has the European Common Agricultural Policy operated since?
- European Common Agricultural Policy has operated since 1957.
What happens to some consumers due to misallocation of resources?
- Some consumers don’t get to consume.
What is the result of misallocation of resources according to the text?
- Allocatively inefficient
- Leads to net welfare losses
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What is 'Tit for Tat' Retaliation?
- If we impose a trade barrier (tariff or otherwise), countries that receive our M will too.
- Example: G Bush steel tariffs 2002.
What is the current situation with the WTO regarding complaints and retaliation?
- Now we are in the WTO, complaints are up (expected) but the rule on it legitimate retaliation can take place...so it shouldn’t escalate.
What is a "Corruption Magnate"?
- Direct transfer of resources from Consumers to Firms.
- Large incentive to bribe lawmakers.
- Erodes Govt’s integrity.
What happens when "X – inefficiencies develop"?
- Due to less competition, they become complacent and inefficiencies creep in.
- Consumers paying higher prices.
What is the effect of higher M cost?
- Reduces standards of living.
Give examples of Voluntary Export Restraints (VERs).
- Japanese cars to US and EU
- US beef to Korea
How does reduced X competitiveness affect exporters?
- If M of components/resources cost more, costs will be higher for exporters.
- Inefficient producers demanding FoP increases cost for efficient ones.
- Example: China textile industry lobbied for reduced cotton quota.
What are Voluntary Export Restraints (VERs) often used for?
- Often used to pre-empt a trade dispute.
- Far more preferable to exporters as they get a premium.
What does the European Common Agricultural Policy do for farmers?
- Subsidises farmers and sets a guaranteed price, potentially above the market price.
How are inefficient producers incentivized according to the text?
- Incentivised to produce what they are less good at
- Drawing FoPs away from where they have a CA in
What are some arguments for reducing risks and ensuring security of supply?
- Reduce risks/security of supply; e.g., defense and agriculture.
What could potentially result from the European Common Agricultural Policy?
- Could potentially lead to oversupply and a glut in production.
- Milk and wine 'lakes' as well as butter and grain 'mountains' may build.
What do consumers lose due to misallocation of resources?
- Loose Consumer surplus (pay higher prices)
- Lower standard of living
What happens if a country imports a large amount and faces an upward sloping \( S^w \) curve?
- The country may become a monopsonist buyer.
How can preserving ways of life and preventing depopulation be achieved?
- Preserving ways of life and preventing depopulation (e.g., agriculture).
What is restricted by the common external tariff?
- At the same time M are restricted by the common external tariff.
What are countries with huge stocks of cheap labour often accused of?
- Unfair competition
- Exploitative practices
In the UK and tea example, what is the marginal cost for the 11th unit?
- The marginal cost for the 11th unit is 10 pounds.
What is one argument related to preventing unsafe products?
- Prevent unsafe products entering. (see aflotoxin argument)
What must consumers do while stocks must be managed or sold at a loss?
- Consumers have to pay higher prices, while stocks must be managed or sold at a loss – ‘dumping’.
What is the consequence of banning cheap labour?
- Loss of CS
How can governments overcome BoP difficulties due to high levels of M?
- High levels of M lead to pressure on currency.
- The government may restrict M with Quotas or Tariffs.
What would happen if the UK discouraged the consumption of the extra unit by means of a tariff?
- The terms of trade would move in favor of the UK as the base price falls.
Why is it important to prevent dependence on only one industry?
- To prevent dependence on only one industry and promote diversification so protect. E.g., Malawi.
What are the criticisms of the CAP?
- The CAP is expensive and restricts free trade and competition.
How do governments gain revenue and why is it important for certain countries?
- Governments gain revenue from tariffs.
- This may be of particular importance to poor countries with weak bureaucracies.
What might countries such as India do if they lose due to the UK's tariff?
- Countries such as India may retaliate.
What should be referred to for implications of a rise in protectionism?
- See ET March 2007 – 'implications of a rise in protectionism'.
What has the CAP been successful in achieving?
- Successful in increasing production, food security, and stabilising prices.
What do high VAT tax countries often face?
- Lower payroll and other embedded taxes
What is the impact of protectionism on job protection?
- Protectionism may preserve jobs or even create jobs.
- Consumers are likely to pay more and have less choice.
- Jobs may be lost elsewhere due to retaliation.
- Production will be lost from lower cost producers and gains from trade lost.
- Aim to produce what we have a CA in.
- Not always possible (structural UnE), offsetting the inevitable.
What advantage do high VAT countries have when they export?
- Immediate advantage (i.e., 15-20% cheaper)
What is the "Infant industry argument" in the context of justifications for protection?
- New producers face higher costs.
- They lack economies of scale and face set-up costs.
- They will never be able to compete in price terms against existing products.
- Tariff barriers can be removed later once trade is established and firms have gone through a learning curve.
- Examples include Japan, South Korea.
What is dumping in the context of international trade?
- Sale of goods at less than cost price by foreign producers in the domestic market.
- Produced goods but have failed to find a market (e.g., CAP).
- They have SR excess capacity, selling just to cover variable costs.
- Destroy a foreign market and outcompete domestic producers to gain a monopoly and raise prices.
What is the equilibrium price and quantity demanded and supplied domestically?
- Equilibrium price: 30
- Quantity demanded and supplied: 70
Why is learning to compete considered a long-term project?
- It is a long-term project (>5-10 years).
- Most financial backers expect returns in the short-term.
What do some advocate to even out tax differences?
- Taxes to even out
What is a potential cost of overdependence in free trade?
- Small countries may specialize in just a few commodities.
- If the ToT fall, they may experience large falls in GDP.
- Example: Malawi reliant on tea, coffee, and tobacco.
- Imports may be jeopardized for political reasons.
- Example: Oil Crisis 1973.
The country starts to trade internationally. The international price for the product shown is 20. The country can import any amount at this price. What is (i) the new level of demand; (ii) the new level of domestic supply; (iii) the quantity imported?
- (i) New level of demand: 90
- (ii) New level of domestic supply: 30
- (iii) Quantity imported: 60
What challenge do governments face when trying to support new industries?
- Requires governments to 'pick winners'.
- They often have a bad record of this.
- Maybe specific subsidies such as tax concessions, training grants of state control may be more successful.
How are foreign producers affected by tariffs?
- Foreign producers are worse off.
- They sell fewer apples at the same price (post-tariff).
How can free trade affect jobs?
- Changes in CA/demand may lead to Structural UnE.
- FoPs may not be mobile, especially in SR.
- Educated workforces have better occupational mobility.
The government, alarmed at the loss of jobs in the industry, imposes a tariff of 20 per unit. By how much will (i) domestic demand fall; (ii) domestic supply rise; (iii) imports fall?
- (i) Domestic demand fall: 20
- (ii) Domestic supply rise: 20
- (iii) Imports fall: 40
What is the definition of protectionism tariffs?
- A tax on imported goods.
- Meant to protect domestic producers of the goods from cheaper foreign competition.
What is the impact of tariffs on government tax revenue?
- Government tax revenue is created by taxing imported goods.
What would happen if the government imposed a tariff of 40 per unit?
- Domestic demand: 70
- Domestic supply: 70
- Imports: 0
What risks are associated with free trade?
- Sudden changes in D or prices may occur.
- Supplies cut.
- Credit crisis affect other countries' ability to pay.
What is the effect of protectionism tariffs on domestic consumers?
- Consumer surplus decreases.
- The price consumers pay is higher.
- The quantity demanded is lower than with free trade.
What happens to total welfare as a result of tariffs?
- There is a loss of total welfare.
- Resulting from the decrease in consumer surplus.
- Not made up for by the increase in government tax revenue and the increase in producer surplus.
What does "Distn Y" refer to in the context of free trade?
- Benefits to be had from trade may not be shared equally.
- Decreases in RELATIVE SoL.
- Equally within countries.
What are the benefits of free trade?
- Specialisation: In what you are comparatively better at (theory of CA).
- Economies of Scale: Particularly important for small countries.
- Choice: Consumer welfare.
- Innovation: Competition increases, so firms innovate they cut costs and increase reliability. Economies that are cut-off have historically stagnated (e.g., N Korea). On their own they do not have the resources or incentives to keep up with innovation.
What are non-tariff barriers?
- Measures imposed by a G that have the effect of inhibiting trade.
- Examples include H&S rules which are particularly important in food production, e.g., aflatoxin contamination rules on cereals and nuts.
What is the effect of protectionism tariffs on domestic producers?
- Producer surplus has increased.
- The price is higher.
How does free trade impact the environment?
- Unsustainable development and over-exploitation.
- Example: hardwood.
What is meant by "loss of sovereignty" in free trade?
- They lose the ability to make decisions about things that affect them.
What are Voluntary Export Restraints/agreements?
- An agreement by a country to limit its exports to a country a given quantity or quota.
How can free trade lead to a loss of culture?
- Foreign ideas and products.
- Loss of traditional cultures.
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