[REGIONAL ECONOMIC GROUPS / BLOCS] November 30, 2011
Protectionism and Regional economic groups / blocs
Protectionism
Protectionism arises because countries may not always feel that they benefit from
completely free trade. While they may understand that free trade will benefit everyone,
they may be suffering some of the costs associated with trade and feel that they want to
restrict aspects of trading activity. These restrictions are known as protectionism.
Examples of protectionist policies include:
Tariffs - a tariff is a tax on imports. Tariffs reduce supply and raise the price of
imports. This gives domestic equivalents a competitive advantage. Tariffs will
often be charged by regional trading blocs on imports from countries outside the
area. The EU charges a common external tariff (CET) to many goods imported
into the EU.
Quotas - quotas have the effect of restricting the maximum amount of imports
allowed into an economy. Once again they reduce the amount of imports
entering an economy and increase the equilibrium price within the market. The
government receives no revenue from a quota, as it does with a tariff, unless it
can set up a system of licenses.
Export subsidies - export subsidies allow exporters to supply the market with
more product than the natural market equilibrium would have allowed. Foreign
consumers will enjoy increased economic welfare as the price of their purchases
fall. Domestic employees might enjoy more wages and job security, but domestic
taxpayers are footing the bill for this.
If protectionist policies don't benefit a country in the long-run (free trade would be
preferable), then why do countries still put in place protectionist policies? Well, the
reasons include:
To safeguard domestic employment - protectionist polices help to protect
domestic jobs and employee groups/trade unions will often lobby for them.
To correct balance of payments disequilibrium - as demand for imports is
dampened and exports promoted. This will help improve the country's balance of
payments position.
To prevent labour exploitation in developing economies - this is really a
moral argument as it rests on making imports more accurately reflect their true
cost of production. However, it might also reduce imports from some of the
poorest economies in the world.
To prevent dumping - this is where economies sell goods in overseas markets
at a price below the cost of production. Domestic consumers pay more than
those buying overseas. Such low prices are part of a policy to destroy rivals in
exports markets.
To safeguard infant industries - fledgling industries may need some protection
from the power of already established competitors if they are to survive in the
long term.
[REGIONAL ECONOMIC GROUPS / BLOCS] November 30, 2011
Trade Blocs
Free Trade Area
Sovereign countries belonging to the free trade area trade freely amongst them, but
have individual trade barriers with countries outside the free trade area. All members
have most favoured nation status, which means that they are all treated equally.
Customs Union
In a Customs Union the countries are no longer fully sovereign over trade policy. There
will be some degree of standardisation of trade policies. They will have a common
external tariff (CET), which is applied to all countries outside the customs union.
Common Market
This trading bloc is a customs union, which has in addition the free movement of factors
of production such as labour and capital between the member countries without
restriction. Mercosur is an example of a common market comprising of a number of
South American nations. The European Union is also a common market and people and
capital can flow between EU members without restriction.
Economic Union
This is a common market where the level of integration is more developed. The member
states may adopt common economic policies e.g. the Common Agricultural Policy
(CAP) of the European Union. They may have a common currency like the Euro in the
EU. This will involve common monetary policy - in the case of the EU, the European
Central Bank (ECB) in Frankfurt operates monetary policy.
