PJC_H2_ECONS_P2_Q6

Pioneer Junior College (Economics Department) 1 PJC 2017 H2 Prelim Exam Paper 2 Question 6 Question: Protectionism is the deliberate attempt by governme nts to limit imports or promote exports by putting up barriers to trade. Assess the effects of protectionism on consumers, producers and government. [25] Protectionism is a policy of sheltering the domest ic industries from foreign competition through the imposition of trade barriers/ protectionist measure s on foreign goods and services. There are tariff and non-tariff trade barriers. Examples of protecti onist measures that are commonly used are import tariffs, import quotas and export subsidies. Due to the negative effects that globalisation woul d bring about, some economist would argue the use protectionist measures to protect the economy f rom the harmful effects. Thus both the benefits and costs of protectionism should be considered from the perspectives of economic agents. Protection can be given to industries that have los t their competitiveness or comparative advantage. Without any trade barriers, foreign imports which a re cheaper and possibly of better quality will do better than the domestically produced substitutes which are more expensive. Massive unemployment will happen if these are large industries. Governments may use protectionism to prevent this massive unemployment which can lead to loss of income and a drastic fall in the standards of living. For example, restrictions on imports can slow the decli ne of such industries, providing time for labour to be retrained for other growing industries. This reduces the incidence of structural unemployment and helps sustain or at least ameliorate the impact on living standards. Hence, temporary protection for declining industries may be justified to prevent rising unemployment in the short run. Imports can be limited through tariffs or quotas. A tariff is a tax imposed on imported goods. Tariffs raise the price that domestic consumers pay for imp orted goods. Many countries protect their agricultural sector through imposing tariffs, such as the US, Japan and China. Tariff increases the price of imports compared to d omestic goods. With reference to Figure 1, assuming a tariff of t is imposed on imported sugar in the US. This will increase the price of importe d sugar from Pw to Pw+t. Without tariff, the US econo my spends QdQsfc on imported sugar. After tariff, the economy will now spend QdtQstba on impo rted sugar. Tariffs reduce the demand for imports as consumer switch to the relatively cheape r domestic goods. As seen in Figure 1, domestic spending on sugar increases from 0PwcQd to 0(Pw+t)aQdt. An import quota is a policy of only allowing a limi ted quantity of goods to be imported. Limiting the quantity of imports leads to a shortage of imports at the world price, this will drive up domestic pri ces to clear the market. For instance, the US governmen t imposes import qu