Protectionism Can Solve the Problems of Countries Tempted to use such Policies

In this example America has used protectionist methods to solve their problems. They have used it against the United Kingdom. In this example, they have used tariffs. These are just taxes imposed on imports to raise the price, making them higher priced than home-grown products. However, quotas can also be used to reduce trade between countries. They limit the number of imports allowed into a country per year.

Protectionism is good for the country because of many reasons. New or small firms would not be able to benefit from the economies of scale and will therefore have higher prices than foreign firms. Tariffs are then used to make foreign goods more expensive. Protectionism is also used to prevent unemployment. Unemployment would occur if British firms are kept out of business with cheaper foreign goods. Firms would be unable to make profit and would then reduce staff. Dumping causes British firms to sell less and less of their goods because foreign companies initially sell their goods to the UK for below the production cost. Once there are no British firms left, the foreigners raise their price. Protectionism is also used because most of the other countries use them too. Countries will only get rid of trade barriers if other do to, but there are too many countries to do this but the General Agreement on Tariffs and Trade (GATT) was set-up to make countries agree on protectionism. Over-specialisation is also a problem and if a country relies too much on a certain good or 2, as demands changes all the time, there is a possibility that demand for that good. Protectionism methods allow a country to keep a wider range of industries alive.

Questions on International Trade

1. A tariff is a tax on the price of import, but quotas are limit on the amount of imports allowed into a country per year. Tariffs are used to raise the price of foreign goods so more people buy home-made goods. However, quotas only reduce the quantity of the imports without a price change.

2. There are many reasons why countries adopt protectionist methods. New or small firms would not be able to benefit from the economies of scale and will therefore have higher prices than foreign firms. Tariffs are then used to make foreign goods more expensive. Protectionism is also used to prevent unemployment. Unemployment would occur if British firms are kept out of business with cheaper foreign goods. Firms would be unable to make profit and would then reduce staff. Dumping causes British firms to sell less and less of their goods because foreign companies initially sell their goods to the UK for below the production cost. Once there are no British firms left, the foreigners raise their price. Protectionism is also used because most of the other countries use them too. Countries will only get rid of trade barriers if other do to, but there are too many countries to do this but the General Agreement on Tariffs and Trade (GATT) was set-up to make countries agree on protectionism. Over-specialisation is also a problem and if a country relies too much on a certain good or 2, as demands changes all the time, there is a possibility that demand for that good. Protectionism methods allow a country to keep a wider range of industries alive.

3. There are arguments against using protectionism and for free trade between countries. Free trade enables people to sell their products for the people who are willing to pay the highest price for them, so the original producer gains a larger proportion of the money, so free trade means fair trade. Free trade also enables certain goods, especially raw material, to be grown where it is more environmentally appropriate. Therefore the environment gains as well as the economy. Trade barriers hit poor producers, especially in the third world. Tariffs indirectly reduce the demand for the foreign good, so wealthier countries would not pay as much money to the poorer producers. Quotas directly reduce the amount of demand for a good as it would be illegal.

4. Other countries would retaliate against Britain imposing protectionist methods because Britain is a major importer of goods. Britain has an imbalance of payment because it imports more than it exports, so other countries benefit from us buying a lot of their goods. A limit on this would decrease the profits for foreign firms as we would be a major customer. Other countries would not like this as their firms would be put of business and unemployment rising.

5.  a) A trade war is when two or more countries engage in a battle over goods and services imported and exported between them. One, such as the US in this example, would impose barriers limiting and reducing the number of imports into their country, so European Community (EC) countries. The other country would retaliate by imposing trade barriers on the other county’s goods.

b) Countries threaten trade wars because they think in the long-run it would benefit them. A trade war can manipulate another country to your own demands depending on who is the wealthier country economically.  

c) In a trade war between the USA and the EC, I think the EC would suffer the most. The USA has a larger impact on the world economy and international trade than the EC do.  The USA is a very wealthy country so even though it may be illegal, they can manipulate anything, including trade. They can reduce the number of imports into the USA, making the EC suffer because they don’t need the EC, but we, as a group of countries, need them because there would not be too many countries in the world then to trade with.