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The World Trade Organisation was set up on 1995 to promote trade liberalization. It has 153 member who set trade rules and ensure that they are followed. The WTO is the arbitrator of trade-related disputes.

It has been criticised for being biased in favour of the US and EU, whilst being inconsiderate of the needs of developing countries. Therefore, it has tried to establish the following principles:

  • Non-discrimination

  • More open

  • Predictable and transparent

  • More competitive

  • Protect the environment

  • More beneficial for less developed countries

Trade protectionism

Trade protectionism: policies aimed at restricting the flow of imports into a country and creating an artificial advantage to exporting firms.

Tariff: tax on imports aimed at increase the costs of production for foreign firms. These raise the domestic price and domestic production, so that less in imported and consumed.

  • The domestic price increases from world price at Pw to the price with the tariff Pt.

  • Domestic production increases from Q1 to Q2.

  • Consumption decreases from Q2 to Q4.

  • Consumer surplus decreases by area a + b + c + d

  • Producer surplus increases by area a

  • Tariff revenues of area c are created

  • A production inefficiency equal to area b results

  • A consumption inefficiency equal to area d results

  • A welfare loss results of area b + d

Quota: a quantitative restriction on the volume of imports.

  • Increase the domestic price of the protected good from world price, Pw, to the quota price, Pq.

  • Increase in the domestic production of the good from Q1 to Q3.

  • The consumer surplus decreases by area a + b + c + d

  • The producer surplus increases by area a

  • Quota rents, which represent the money typically earned by foreign firms and can now export the product at a higher price, are equal to area c

  • There is a production inefficiency of area b

  • There is a consumption inefficiency of area d

  • The resulting welfare loss is equal to area b + d

Subsidy: lowers domestic firms’ production costs and increases their competitiveness, subsequently imports decrease and exports may increase.

  • There is no change in the domestic price, it remains at the world price, Pw

  • There is no change in the consumption of the good, it remains at Q2

  • Domestic production increases from Q1 to Q3

  • Imports fall from Q1Q2 to Q3Q2

  • There is a wasteful domestic production and resource misallocation

  • Government spending increases

  • Trade frictions emerge

Administrative barriers

Regulatory barriers include product, sanitary and pollution standards which are often aimed at protecting domestic producers and therefore have the effect of reducing imports.

Antidumping duties

Domestic firms may claim that foreign firms are dumping there goods in the domestic market. This means that the foreign firms are selling their products abroad at a price below the average unit price. Therefore, the domestic government puts in place a tariff to raise the foreign firms’ costs and prices.

Arguments for trade protectionism:

  • Protection of domestic jobs as small domestic firms may be put out of business when competeting with large multinational corporations.

  • National security may be at risk if countries become too relient on imports and trade, especially during times of war. For example, during the Second World War Germany was largely isolated and therefore could not rely as much on trade, so selfsufficiency through trade protectionsim became more important.

  • Protection of infant industries may be necessary in order to allow them to grow until they can make use of the economies of scale that large foreign firms already have access to.

  • Trade protectionism may maintain health, safety and environmental standards by regulating imports.

  • Tariffs may be used as anti-dumping measures against unfair competition which is due to foreign firms selling products below their average costs in other countries.

  • Overcoming a balance of payments deficit may be achieved through trade protectionism as expenditure on imports declines and exports may fall in price, due to subsidies, so that they become more attractive to foreigners.

  • Protectionism, particularly tariffs, can be a source of government revenue

Arguments against trade protectionism:

  • Government intervention tends to distort the market which leads to the misallocation of resources as less efficient industries become relient on government protection

  • Protectionism tends to anger other countires so they may retailiate by imposing their own trade barriers, in turn creating “trade wars”.

  • Companies are more incentivised to be seen as favourably by the government so bribes and corruption may increase. Also illegal smuggling may increase in order to permit consumers access to foreign goods that the government has tried to reduce the supply of.

  • Protected firms lack the incentives to innovate and improve due to the lack of competition. So productivity and efficiency may fall, creating increased costs of production.

  • Under protectionism, lower cost imports are more difficult to access and the prices set by domestic producers are likely to be higher, so domestic consumers must pay these higher prices.

  • The costs of imported factors of production increase so inflation may increase and domestic firms relying on these imported primary goods may be put out of business.