International Trade - Protectionism

Although free trade has been widely touted by trade economists as the ideal condition for economic progress, the uneven distribution of benefits has prompted governments to consider the imposition of trade protectionism. Examine the notion of protectionism and how different measures prepared by our JC Economics Tutor Simon Ng from Economicsfocus, like tariffs and quotas, are used to insulate economies from the adverse effects of external shocks. Protectionism can be better understood by referring to actual case studies.

economics tuition notes definition


What is import substitution strategy?

-Strategy to replace imported goods and services by producing them domestically.

What is protectionism?

-The act of imposition of trade barriers on the importing of goods and resources by regulating the prices or quantity of the imported goods and resources so as to encourage the growth of local production. This is line with the notion of import substitution strategy, which involves the replacement of imports with local production.

What methods of protectionism are there?

-Tariffs or Custom Duties


-Import Licenses

-Embargos on Imports


-Exchange Controls

Why should countries use protectionism?

-Protect growing industries

-May help to widen the scope of economic growth

-Prevent dumping

-Allow declining industries to phase out gradually

-Dampen impact of unemployment during recession

-Protect home industries from foreign competition

-Retaliate against another country

-Correct balance of payment disequilibrium

-Protect key industries to sustain economic growth

-Allow economy to be more self-sufficient

What is trade diversion?

-Where a customs union results in greater specialization according to comparative advantage, and hence a shift in production from higher cost to lower cost sources.

What is ‘dumping’?

-Foreign producers selling at a price below their cost

How are subsidies used as an act of protectionism?

-Increase subsidies to local producers  - fall in COP – fall in Price of local goods – replace the more expensive imports

-Subsidized exporters and domestic producers will have lower the cost of production and thus enables the firms to lower the cost of production so as to lower the price of export goods to increase export demand while the domestic price of local goods will be lowered to substitute imported good

-Increase subsidies to lower cost of production – decrease price of export – increase in export demand

What are exchange controls?

-The control of amount of foreign exchange available for imports which will indirectly control the value of import expenditures.

What are tariffs?

Custom duties or tax on imported goods and services by the government.

What are quotas?

-Quantity restriction imposed on imported goods and services by the government.

What are embargos?

-Complete ban on certain imports to or exports from a country

What is import expenditure?

-Amount spent on importing goods and services from foreign country into the domestic country

What are intellectual property rights?

-Encourage the growth research and development and investment in these areas

What is government procurement?

-Increase transparency of procurement process

-Increase business opportunity with foreign government

What is a custom union?

-An agreement where no tariff and trade restriction among the nations but a common tariff against other trading nations.

What is trade creation?

-Arises when there is a shift in trade from a high-cost producer to a low-cost member country.

What is preferential trade agreement (PTA)?

-A trade agreement whereby trade between the signatories is freer than trade with the rest of the world. There will be no restriction of trading activities and regulation of the flow of investment and mobility of resources.

What is common market?

-An agreement where no tariff and trade restrictions among nations and they are to use a common monetary and fiscal policy.

What is export revenue?

-Amount earned from exporting goods and services from domestic country out to foreign country.

What is balance of trade?

-It refers to the difference between the total value of goods and services exported to other nations and the total value of foreign goods and services spent by local economy

-Balance of trade  = Export revenue – Import Expenditure

What is an infant industry?

-An industry that is just starting out and hence vulnerable to collapse when faced with more established foreign competition.

What is production capacity?

-It refers to the volume of production that can be attained over a fixed period of time.

What is advanced economy? What is a developed economy

-It refers to a highly-developed economy. For instance, USA is an advanced economy.

What is emerging economy? What is a developing economy?

-It refers to a growing economy that is experiencing extensive growth and undergoing rapid industrialization. For instance, China and India are emerging economies.

What is factor endowment?

-It refers to the amount of land, labor, entrepreneurship and money that can allocated for production within a country.

What is the Marshall-Lerner condition?

-It refers to an economic condition that affects the effectiveness of currency revaluation, when the sum of elasticity of demand for imports and exports is greater than one.

What is taxation?

-It refers to the compulsory imposition of fine by the authorities on individuals, so as to deter certain consumer or producer behavior.

What is mobility of resources?

-It refers to the ease of flow of labor and capital from one point to another. (i.e. between countries, cities, firms, individuals)

What is deregulation?

-It refers to the reduction of government intervention in certain economic activities.

What is transaction?

-It refers to the movement of funds to direct the movement of specific durable goods or raw materials.

What is a trade union?

-It refers to an organization of workers and employers to regulate the relations of those involved, so as to protect their interests.

What is ‘retaliation’?

-Also known as a form of protectionism, it involves the imposition of trade barriers by one country, in response to the protectionist measures imposed by the other country.

What are exchange rate fluctuations?

-It refers to the change in value of a currency against another currency due to certain economic conditions, like hot money.