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17.3: Restrictions on International Trade

  • Page ID
    14133
  • Learning Objectives

    1. Define the term protectionist policy and illustrate the general impact in a market subject to protectionist policy.
    2. Describe the various forms of protectionist policy.
    3. Discuss and assess the arguments used to justify trade restrictions.

    In spite of the strong theoretical case that can be made for free international trade, every country in the world has erected at least some barriers to trade. Trade restrictions are typically undertaken in an effort to protect companies and workers in the home economy from competition by foreign firms. A protectionist policy is one in which a country restricts the importation of goods and services produced in foreign countries. The slowdown in the U.S. economy late in 2007 and in 2008 has produced a new round of protectionist sentiment—one that became a factor in the 2008 U.S. presidential campaign.

    The United States, for example, uses protectionist policies to limit the quantity of foreign-produced sugar coming into the United States. The effect of this policy is to reduce the supply of sugar in the U.S. market and increase the price of sugar in the United States. The 2008 U.S. Farm Bill sweetened things for sugar growers even more. It raised the price they are guaranteed to receive and limited imports of foreign sugar so that American growers will always have at least 85% of the domestic market. The bill for the first time set an income limit—only growers whose incomes fall below $1.5 million per year (for couples) or $750,000 for individuals will receive direct subsidies (The Wall Street Journal, 2008).

    The U.S. price of sugar is almost triple the world price of sugar, thus reducing the quantity consumed in the United States. The program benefits growers of sugar beets and sugar cane at the expense of consumers.

    Figure 17.10 The Impact of Protectionist Policies

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    Protectionist policies reduce the quantities of foreign goods and services supplied to the country that imposes the restriction. As a result, such policies shift the supply curve to the left for the good or service whose imports are restricted. In the case shown, the supply curve shifts to S2, the equilibrium price rises to P2, and the equilibrium quantity falls to Q2.

    Source: Historical Statistics, Colonial Times to 1970: Statistical Abstract of the United States 1998, Table no. 1325; Statistical Abstract of the United States, 1990; U.S. International Commission (http://dataweb.usitc.gov/prepared_reports.asp).