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Who benefits and who pays?

Using the demand and supply model, consider the impact of protectionism on producers and consumers in each of the two countries. For protected producers like U.S. sugar farmers, restricting imports is clearly positive. Without a need to face imported products, these producers are able to sell more, at a higher price. For consumers in the country with the protected good, in this case U.S. sugar consumers, restricting imports is clearly negative. They end up buying a lower quantity of the good and paying a higher price for what they do buy, compared to the equilibrium price and quantity without trade. The following Clear It Up feature considers why a country might outsource jobs even for a domestic product.

Why are life savers, an american product, not made in america?

Life Savers, the hard candy with the hole in the middle, were invented in 1912 by Clarence Crane in Cleveland, Ohio. Starting in the late 1960s and for 35 years afterward, 46 billion Life Savers a year, in 200 million rolls, were produced by a plant in Holland, Michigan. But in 2002, the Kraft Company announced that the Michigan plant would be closed and Life Saver production moved across the border to Montreal, Canada.

One reason is that Canadian workers are paid slightly less, especially in healthcare and insurance costs that are not linked to employment there. Another main reason is that the United States government keeps the price of sugar high for the benefit of sugar farmers, with a combination of a government price floor program and strict quotas on imported sugar. According to the Coalition for Sugar Reform, from 2009 to 2012, the price of refined sugar in the United States ranged from 64% to 92% higher than the world price. Life Saver production uses over 100 tons of sugar each day, because the candies are 95% sugar.

A number of other candy companies have also reduced U.S. production and expanded foreign production. Indeed, from 1997 to 2011, some 127,000 jobs in the sugar-using industries, or more than seven times the total employment in sugar production, were eliminated. While the candy industry is especially affected by the cost of sugar, the costs are spread more broadly. U.S. consumers pay roughly $1 billion per year in higher food prices because of elevated sugar costs. Meanwhile, sugar producers in low-income countries are driven out of business. Because of the sugar subsidies to domestic producers and the quotas on imports, they cannot sell their output profitably, or at all, in the United States market.

The fact that protectionism pushes up prices for consumers in the country enacting such protectionism is not always acknowledged openly, but it is not disputed. After all, if protectionism did not benefit domestic producers, there would not be much point in enacting such policies in the first place. Protectionism is simply a method of requiring consumers to subsidize producers. The subsidy is indirect, since it is paid by consumers through higher prices, rather than a direct subsidy paid by the government with money collected from taxpayers. But protectionism works like a subsidy, nonetheless. The American satirist Ambrose Bierce defined “tariff” this way in his 1911 book, The Devil’s Dictionary : “Tariff, n. A scale of taxes on imports, designed to protect the domestic producer against the greed of his consumer.”

The effect of protectionism on producers and consumers in the foreign country is complex. When an import quota is used to impose partial protectionism, the sugar producers of Brazil receive a lower price for the sugar they sell in Brazil—but a higher price for the sugar they are allowed to export to the United States. Indeed, notice that some of the burden of protectionism, paid by domestic consumers, ends up in the hands of foreign producers in this case. Brazilian sugar consumers seem to benefit from U.S. protectionism, because it reduces the price of sugar that they pay. On the other hand, at least some of these Brazilian sugar consumers also work as sugar farmers, so their incomes and jobs are reduced by protectionism. Moreover, if trade between the countries vanishes, Brazilian consumers would miss out on better prices for imported goods—which do not appear in our single-market example of sugar protectionism.

The effects of protectionism on foreign countries notwithstanding, protectionism requires domestic consumers of a product (consumers may include either households or other firms) to pay higher prices to benefit domestic producers of that product. In addition, when a country enacts protectionism, it loses the economic gains it would have been able to achieve through a combination of comparative advantage, specialized learning, and economies of scale, concepts discussed in International Trade .

Key concepts and summary

There are three tools for restricting the flow of trade: tariffs, import quotas, and nontariff barriers. When a country places limitations on imports from abroad, regardless of whether it uses tariffs, quotas, or nontariff barriers, it is said to be practicing protectionism. Protectionism will raise the price of the protected good in the domestic market, which causes domestic consumers to pay more, but domestic producers to earn more.

Problems

Assume two countries, Thailand (T) and Japan (J), have one good: cameras. The demand (d) and supply (s) for cameras in Thailand and Japan is described by the following functions:

Qd T  =  60 – P
Qs T  =  –5 +  1 4 P
Qd J  =  80 – P
Qs J  =  –10 +  1 2 P

P is the price measured in a common currency used in both countries, such as the Thai Baht.

  1. Compute the equilibrium price (P) and quantities (Q) in each country without trade.
  2. Now assume that free trade occurs. The free-trade price goes to 56.36 Baht. Who exports and imports cameras and in what quantities?
Got questions? Get instant answers now!

References

Bureau of Labor Statistics. “Industries at a Glance.” Accessed December 31, 2013. http://www.bls.gov/iag/.

Oxfam International. Accessed January 6, 2014. http://www.oxfam.org/.

Questions & Answers

Macroeconomic definetion
farooq Reply
I need short examples for costumer
Palden
we are costumer of this application,
sarajuddin
Marshall 's definition
Arun Reply
perfectly competitive firm earn zero economic profit in the long run.is it true or false
Sapna Reply
False...some, in the long run earn normal profit while some zero or negative profit(loss) which forces them out of the market..
Alex
what is supply
Sapna Reply
supply is the amount of goods and services that supplies are willing and able to sell at a given price at a particular period of time.
Bukari
Hey how Sapna...I have the que... I can see supply does with selling;yah that's great... So cost of production is the determinant of supply though;how does it relate to selling yet? The supply definition u just gave is not complete yet... *SUPPLY* DEFINITION HAS TO DO WITH SELLING AND PRODUCING.
Mahapa
what is difference between elastic and inelastic ?
saqlain Reply
what does a supply curve look like?
master Reply
It's the curve that has a positive gradient
Mahapa
you are right mahapa
Francis
please explain cob doglas thiory
Ibrahim
'cardinal utility implies ordinal utility'.Do you agree?
Bukari
prove
Bukari
what is relative price.?
Harpreet Reply
when the price of 2 commodity is compared with each other,the price of one commodity to another one's price is said to be relative price
Royalranjan
business organization and industry?
ALIYU Reply
history of monetary policy
Estah Reply
instrument of monetary policy
mustapha
open market,funding ,bank rate
Muafue
open market operation,Funding,Bank rate
Muafue
thanks guys
Estah
What is elasticity?
Moses Reply
level or degree of responsiveness of change in quantity as a result of change in price
Alex
is the degree of responsiveness of a quatity demand respond to small charge in price
EBENEZER
the degree of responsiveness of quantity demanded to a change in price, income or other related commodities
Dorothy
what are the Factor affected elastricity of demand and supply
Kelvin Reply
price of other related goods
Frank
fine
Bisrat
Taste. Income.
Chandrapaul
what is economic ?
Cabdulahi Reply
what is price ceiling and price floor
Mokom Reply
price ceiling is a government deliberate act of imposing a limit on prices of goods n services sold in an economy...price floor is exactly the opposite
Alex
both are a form of price control by the government. price ceiling is the subsidy to consumer by setting maximum limit to the price and prducers of good cannot charge a higher price than this price limit which is known as price ceiling
Amber
what's the difference between average product and marginal product
Francis Reply
average cost/revenue and marginal cost/revenue
Alex
A Washington state district court currently has subject matter jurisdiction over many types of civil cases, if the amount in controversy is $150,000 or less.
Sina Reply

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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