A study on relevance of protective trade policy

Definition: Trade protectionism is used by countries when they think

their industries are being damaged by unfair competition from foreign industries.
It's a defensive measure, and is usually politically motivated. It can often work, in
the short run. However, in the long run it usually does the opposite of its intentions.
It can make the country, and the industries it is trying to protect, less competitive
on the global marketplace.
Countries use a variety of ways to protect their trade. One way is to
enact tariffs, which tax imports. This immediately raises the price of the imported
goods, making them less competitive when compared to locally produced goods.
This works especially well for a country like the U.S., which imports a lot of
consumer products and oil.
The most famous example is the Smoot-Hawley Tariff of 1930. It was
originally designed to protect farmers from agricultural imports from Europe,
which was stepping up farming after the destruction of World War I. However, by
the time the bill made it through Congress, it had slapped tariffs on many more
imports. As so often happens with tariffs, other countries retaliated. This tariff war
restricted global trade, and was one reason for the extended severity of theGreat
Depression.
A second way of protecting trade is when the government subsidizes local
industries with tax credits or even direct payments. This again lowers the price of
locally produced goods and services. It works even better than tariffs because now
the goods are cheaper even when shipped overseas. This works well for the U.S.,
but even better for countries that rely mainly on exports.
A good example of this is, once again, in the U.S. agricultural industry.
TheAgricultural Adjustment Act of 1933 allowed the government to pay farmers to
not grow crops or livestock, thus restricting supply and raising prices. This
subsidy helped farmers who had been devastated by the Dust Bowl.

Protectionism is the economic policy of restraining trade between states

(countries) through methods such as tariffs on imported goods, restrictive quotas,
and a variety of other government regulations designed to allow (according to
proponents) fair competition between imports and goods and services produced
domestically.
This policy contrasts with free trade, where government barriers to trade are
kept to a minimum. In recent years, protectionism has become closely aligned
with anti-globalization and anti-immigration. The term is mostly used in the
context of economics, where protectionism refers to policies or doctrines which
protect businesses and workers within a country by restricting or regulating trade
with foreign nations.

History
Historically, protectionism was associated with economic theories such
as mercantilism (that believed that it is beneficial to maintain a positive trade
balance), and import substitution. During that time, Adam Smith famously warned
against the "interested sophistry" of industry, seeking to gain advantage at the cost
of the consumers.
Mainstream economists agree that protectionism is harmful in that its
costs outweigh the benefits and that it impedes economic growth.
Cambridge University Professor Ha-Joon Chang argues that virtually
all developed countries today successfully promoted their national industries
through protectionism. Chang points to the significantly high tariffs of the UK, the
US and other countries during their process of industrialization. While noting the
success of protectionism, Chang has attempted to argue that it would be unfair if
the developed countries now re-instituted protectionism by stating that those
countries that used protectionist policies during their growth would be trying to
"kick away the ladder" from developing countries. In the words of 19th century
German economist, Friedrich List:
It is a very common clever device that when anyone has attained the
summit of greatness, he kicks away the ladder by which he has climbed up, in
order to deprive others of the means of climbing up after him. In this lies the secret
of the political doctrine of Adam Smith, and of the political tendencies of his great
contemporary William Pitt, and of all his successors in the British Government
administrations. Any nation which by means of protective duties and restrictions
on navigation has raised her manufacturing power and her navigation to such a
degree of development that no other nation can sustain free competition with her,
can do nothing wiser than to throw away these ladders of her greatness, to preach
to other nations the benefits of free trade, and to declare in penitent tones that she
has hitherto wandered in the paths of error, and has now for the first time
succeeded in discovering the truth.

Advantages of Trade Protectionism

If a country is trying to grow strong in a new industry, tariffs will protect it
from foreign competitors. This allows companies in the new industry time to learn
how to produce the good efficiently, and develop their own competitive
advantages.
Protectionism also temporarily creates jobs for domestic workers. As
domestic companies are protected by tariffs, quotas or subsidies, they will hire
locally. This will occur until other countries retaliate by erecting their own
protectionism within that industry.

Disadvantages of Trade Protectionism

In the long term, trade protectionism weakens the industry. Without
competition, companies within the industry won't innovate and improve their
products or services. There's no need to. Eventually, consumers will pay more for a
lower quality product than they would get from foreign competitors.
Job outsourcing is a result of declining U.S. competitiveness, itself a result
of decades of the U.S. not investing in education. This is particularly true for high
tech, engineering, and science. Increased trade opens new markets for businesses
to sell their products. The Peterson Institute for International Economics estimates
that ending all trade barriers would increase U.S. income by $500 billion.
Increasing U.S. protectionism will further slow economic growth and cause
more layoffs, not less. If the U.S. closes its borders, other countries will do the
same. This could cause layoffs among the 12 million U.S. workers who owe their
jobs to exports.

Free trade Vs protection

The commercial policy of a country enables a choice between free
trade and protection. If the choice is protection, it may suggest methods of
protection and extent of protection. Presently the world economic order does
not encourage free trade. The choice is only between the methods of
protection and the extent of protection.
However, there are several cases developed in favor of
protection.Uniformly free trade is abundant because it favors developed
countriesmore than underdeveloped countries.
Free Trade:
The classical political economy strongly advocates free trade. Free
trade is the freedom of trade where countries can import or export on the
merit of efficiency in absence of any trade barrier. Free trade is proposed for
its several advantages.
1. The region of trades maximizes the volume. When countries trade freely,
the volume of merchandise tends to be high.
2. Countries would specialize on the basis of resources and the cost
advantage will be high.
3. When countries operate according to cost advantage, the resource used
will be most efficient.
4. The cost of production will be low enabling lower prices and advantage to
the consumers.
5. Free trade develops mutual dependence and friendly economic relation.
However free trade is restricted on the grounds that it benefits only advanced
countries. The countries which have high bargaining power and elastic
merchandise get larger advantage.
In most cases free trade may develop international monopolies and
unfair trade practices. As against free trade, the idea of protectionism
developed since inter war period. Protection is enforced by a series of
methods like tariff duties, import sanction, regional economic co-operation,
economic sanction, and trade embargo.

Arguments in favor of protection

The policy of protection is argued on several grounds. Restriction on
trade often attracts retaliation. In bilateral trade agreement the policy of protection
is designed carefully. Protection should safeguard the economic interest and also
prevent the possibility of
There are several argument developed in favor of protection. There
are counter argument as well, but protection prevails. The world economic
community has protection as an only alternative.
A. Infant industries argument
In an underdeveloped country the industries will be in infancy. In the initial years
of development the industry may not be effective in terms of cost and resource use.
The price will be high. Given free trade such inefficient industry will fail in
competition with other countries. The industry will gradually turn sick and shut
down. During such infancy the industry need to be protected from international
competition. Once industry develops it can sustain competition and sell goods.
There are counter argument to infant industries:
1. In an under developed country all industries will be at infancy. It is difficult to
isolate an industry as infant.
2. Protection to industry is a concession. It may give rise to high discriminative
policy with corruption.
3. On grounds of protection inefficiency is promoted and resources under utilized.
4. It is believed that industries protected once may remain so forever there is no
incentive for efficiency.
5. Collective bargaining encouraged domestically can protect corporate interest
6. child labour.
7. A well developed antitrust legislation can prevent dumping
8. environmental protection,

9. equal opportunity,
10. Protection of Intellectual property rights can prevent competition from MNCs.
11. Strong minimum wage, occupational safety, and health legislation can safe
guard the interests of local industry.
However protection is advocated on grounds of long term interest and macro
objective.
B. Labor argument :
When a country imports a good from labor intensive economy the condition of
domestic labor employment and wages worsen. When labor intensive goods are
imposed employment is generated in the exporting country. To that extent the
importing country may suffer decline in wages and employment.
The counter agreement states that labor intensive goods are imported only when
the domestic level of employment is very high with high wages it will not be
economical to produce goods domestically. Further the proportion of labor
intensive good in the total import will be so small that adverse effect cannot take
place.
However while importing labor intensive goods care should be taken to ensure the
domestic interest of employment and wages.
C. Key trading argument
A country shall develop key important and basic industries on its own. Depending
on imports may not provide continuous flow of inputs.
D. Strategic and defense industries argument:
The defense industries should be developed internally for reasons of strategic
importance. Technology developed internally provides greater security. Efficiency
in resource utilization is not an important issue.

E. Terms of Trade Argument:

Tariff is an instrument of protection. It is seen that imposition of tariff brings in
several advantage and improves terms of trade.
F. Balance of payments Argument :
The objective of protection is to restrict imports. It helps in covering Balance of
trade deficit and Balance of payments improves.
G. Revenue Argument:
Tariff as an instrument of protection brings revenue. For developing economies the
revenue generated through custom duty is significant.
H. Economic Independence Argument :
Every economy wants to grow rapidly. Such rate of economic growth should be
self supporting. This is called as sustainable growth. Protection helps in sustainable
growth.
I. Retaliation Argument :
Protection is used in relation to other countries import restriction. In bilateral trade
protection is an instrument of retaliation.

Arguments against Protectionism

Protectionism is frequently criticized by economists as harming the
people it is meant to help. Mainstream economists instead support free
trade. Economic theory, under the principle of comparative advantage, shows that
the gains from free trade outweigh any losses as free trade creates more jobs than it
destroys because it allows countries to specialize in the production of goods and
services in which they have a comparative advantage. Protectionism results
in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a
free market, where there is no such total loss. According to economist Stephen P.
Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.
Economists, including Nobel prize winners Milton Friedman and Paul
Krug man, believe that free trade helps workers in developing countries, even
though they are not subject to the stringent health and labour standards of
developed countries. This is because "the growth of manufacturing and of the
myriad other jobs that the new export sector creates has a ripple effect
throughout the economy" that creates competition among producers, lifting wages
and living conditions. Economists have suggested that those who support
protectionism ostensibly to further the interests of workers in least developed
countries are in fact being disingenuous, seeking only to protect jobs in developed
countries. Additionally, workers in the least developed countries only accept jobs if
they are the best on offer, as all mutually consensual exchanges must be of benefit
to both sides, or else they wouldn't be entered into freely. That they accept lowpaying jobs from companies in developed countries shows that their other
employment prospects are worse. A letter reprinted in the May 2010 edition of
Econ Journal Watch identifies a similar sentiment against protectionism from
sixteen British economists at the beginning of the 20th century.

Alan Greenspan, former chair of the American Federal Reserve, has

criticized protectionist proposals as leading to an atrophy of our competitive
ability. If the protectionist route is followed, newer, more efficient industries will
have less scope to expand, and overall output and economic welfare will suffer.
Protectionism has also been accused of being one of the major causes of
war. Proponents of this theory point to the constant warfare in the 17th and 18th
centuries among European countries whose governments were predominantly
mercantilist and protectionist, the American Revolution, which came about
ostensibly due to British tariffs and taxes, as well as the protective policies
preceding both World War I and World War II. According to a slogan of Frdric
Bastiat (18011850), "When goods cannot cross borders, armies will."
Free trade promotes equal access to domestic resources (human, natural,
capital, etc.) for domestic participants and foreign participants alike. Some thinker
extend that under free trade, citizens of participating countries deserve equal access
to resources and social welfare (labor laws, education, etc.). Visa entrance policies
tend to discourage free reallocation between many countries, and encourage it with
others. High freedom and mobility has been shown to lead to far greater
development than aid programs in many cases, for example eastern European
countries in the European Union. In other words visa entrance requirements are a
form of local protectionism.

Instruments of protection

1. Tariffs:
Typically, tariffs (or taxes) are imposed on imported goods.Tariff
rates usually vary according to the type of goods imported. Import tariffs
will increase the cost to importers, and increase the price of imported goods
in the local markets, thus lowering the quantity of goods imported, to favor
local producers. Tariffs may also be imposed on exports, and in an economy
with floating exchange rates, export tariffs have similar effects as import
tariffs.
2. Import quotas:
Quotas are used to reduce the quantity and therefore increase the market
price of imported goods. The economic effects of an import quota are similar
to that of a tariff, except that the tax revenue gain from a tariff will instead
be distributed to those who receive import licenses. Economists often
suggest that import licenses be auctioned to the highest bidder, or that import
quotas be replaced by an equivalent tariff.
3. Administrative barriers:
Countries are sometimes found using their various administrative rules (e.g.
regarding food safety, environmental standards, electrical safety, etc.) to
introduce barriers to imports.
4. Anti-dumping laws prevent "dumping" of cheaper foreign goods that
would cause local firms to close down. However, in practice, antidumping
laws are usually used to impose trade tariffs on foreign exporters.
5. Direct subsidies:
Government subsidies (in the form of lump-sum payments or cheap loans)
are sometimes given to local firms that cannot compete well against imports.
These subsidies protect local jobs, and to help local firms adjust to the world
markets.

6. Export subsidies:
Export subsidies are often used by governments to increase exports. Export
subsidies are the opposite of export tariffs; exporters are paid a percentage of
the value of their exports. Export subsidies increase the amount of trade, and
in a country with floating exchange rates, have effects similar to import
subsidies.
7. Exchange rate manipulation:
A government may intervene in the foreign exchange market to lower the
value of its currency by selling its currency in the foreign exchange market.
Doing so will raise the cost of imports and lower the cost of exports, leading
to an improvement in its trade balance.
8. International patent systems:
National patents help protect trade at a national level in two ways. Firstly,
when patents held by one country form relative advantage in trade
negotiations against another, secondly patents confers "good citizenship"
status.
9. Employment based immigration restrictions, such as labor certification
requirement or numerical caps on work visas.

Tariff
Tariff is an important instrument of protection. It is a tax duty imposed on
imports. The objective is to make import expensive, discourage import and
courage domestic industries.
In practice tariff can be levied in four ways :
1. Specific duty: It is a duty levied as per the quantity. Specific dutyis levied
in case of bulk low value merchandise.

2. Ad velorm: It is a duty imposed as per the value. Ad velorm duty is

imposed on high value merchandise.
3. Sliding scale duties: It is a variable duty imposed on imports to make
their price less competitive in the home market.
4. Tariff quota: It is a tariff duty imposed together with quota restriction.
Tariff is a domestic instrument of protection. It gives the choice of
consumption but at a higher price. Tariffs are uniformly imposed by
developing countries due to various effects. Following are various effects of
tariff.
1. Protection effect: When tariff is levied the price increases. At increased
price the domestic industry can expand supply this is protection effect.
2. Consumption effect: When price increases due to tariff, there is a decline
in demand and consumption. This is consumption effect.
3. Revenue effect: On imports the government levies tax and mobilizes
revenue. This is revenue effect.

4. Redistribution effect: A part of domestic industry was competitive even at

lower price. This industry now earns super normal profit due to increased
price. This is the income redistributed by the industry from other sectors.
This is Redistribution effect
5. Balance of payment effect: Tariff improves Balance of payment by
contracting imports.
6. Terms of trade effect: Imposition of tariff will force the exporting country
to reduce its price. It improves terms of trade position.
7. Income effect: Expansion of domestic production will increase the level
of employment and income. It is the income effect. Tariff is commonly used
for its multiple effects. The commercial policy of a country should be made
up of tariff and quotas. Tariff is a democratic method which also brings in
revenue for the govt. It is a significant recourse for a developing economy.
On the other hand quota is a positive restriction. It helps the government
plan imports with minor defects. However quota is not a popular instrument
because it attracts retaliation.

Import Quota

The commercial policy contains a direct restrictive instrument called import

quota. Import quota is a positive restriction on incoming goods regardless of
tariff.
It is not a demand instrument. It does not provide freedom of consumption.
Quota is imposed as a serious retaliatory measure.
Following are the objective of quota:
1. To restrict import directly from a particular country globally.
2. It is used as a strong retaliatory move.
3. Quota imposes B.O.P disequilibrium position.
4. With import license quota provides better supervision of precious imports.
Import quota can be levied with tariff commonly called as tariff quota. An
ideal commercial policy should be made up of quota and tariff. Import
quotas provide all the effect provided by tariff except revenue.
1. Protection effect: Restriction on import automatically increases the price.
At the enhanced price the industry can expand supply. This is the offset of
production.
2. Consumption effect: Imposition of quota is a direct restriction on
consumption. With decrease in demand the consumption also decreases.
3. Redistribution effect: Quota restriction enhance price uniformly. The
industry which was economical at lower price now draws super normal
profit. This is the effect of redistribution effect where incomes flow from
other sectors.

4. Balance of payment effect: Control of imports improve Balance of

payment position. This position on merchandise improves.
5. Retaliation effect: Quota can be used as an retaliatory policy.Severe quota
restriction and prohibition of imports can be termed as import embargo or
economic sanction.
6. Integration effect: Quota restriction followed by group of countries is
found as regional economic co-operation. This is integration of regional
countries.
In addition quota may offer all those effects found with tariff income effect,
employment effect, bargaining power, terms of trade effect can be found.
However with pure quota revenue cannot be derived.
Import quotas together with import licensing system may not only control
import but also supervise usage of imports. Under developed countries apply
quota to protect home industry and developed nations use quota for
improving bargaining power.

Dumping
Haberler defines dumping as "the sale of a good abroad at a price which is
lower than the selling price of the same good at the same time and in the
same circumstances at home, taking account of differences in transport
costs."
Under dumping, a producer possessing monopoly in the domestic market for
his product charges a high price to the domestic buyers and sells it at a low
competitive price to the domestic buyers and sells it at a low competitive
price in the foreign market. A reverse dumping is followed if a producer
charges a low domestic price and high foreign price for the product.
Discriminatory monopoly pricing in foreign trade is described as dumping.
It implies different prices in the domestic and foreign markets.
In this special case of price discrimination where the firm is a monopolist in
the home market and faces competition in the foreign market.
In the home market the firm faces a downward sloping (demand) AR
curve whereas in the foreign market the AR curve is perfectly elastic
with AR=MR=Price relation.

The firm firstly, determines the out put to be produced for the local as well
as the foreign markets. There after, the out put needs to be distributed among
home and foreign markets. Finally, the price is determined.
1. Out put determination
MC = MR ( maximum possible MR)
2. Out put distribution
MRh = MRf
3. Price determination
The prices are determined as per AR in the home market and at the existing
price at the foreign market.
The out put is determined by equating MC=MR. This is the profit
maximizing out put. The out put is distributed by equating MRs in different
markets. i.e. MRf = MRh

At this point the out put is allotted for home market and he price is
determined as per the downward sloping demand curve. The remaining out
put is sold in the foreign market at the price prevailing as per
AR=MR=Price.
It can be seen that the firm sells a small out put in the home market at high
price and a large out put in the foreign market at low price. This is called
dumping.
The rationale behind dumping is that it enables the exporter to compete in
the foreign market and capture the market by selling at a low price, even
sometimes below costs and to make up for the deficiency in sales revenueby
charging high prices to the home buyers (taking advantage of monopoly
power in the home market). In fact, the higher domestic price serves to
subsidies a segment of the foreign price which helps considerably in
promoting exports.
The export earnings may, however, be made available to promote the growth
of home industries, which otherwise would not have been possible.
Moreover, by resorting to dumping, when the producer is able to widen the
size of foreign markets for his product, his investment risks are minimized
and when he has to launch large scale production he can reap the economies
of large scale resulting in costs minimization. Eventually, in the long run, it
may become possible for him to sell goods at cheaper rates in the domestic
market as well.

Dumping, in essence, implies price discrimination. The success of

international price discrimination, however, depends on the following
conditions:
The producer must possess a degree of monopoly power at least in the
home market.
There must be clearly defined separate markets. In international trade,
markets are clearly differentiated into home and foreign markets. In
fact, in international trade, markets are separated by space, difference
of customs, nationals, languages, currencies, etc.
It should not be possible for the buyers to resell the goods from a
cheaper market to the dearer one. In foreign trade, of course, the
distance, transport cost element and the customs prevent this
tendency.
Price discrimination is profitable only when two different markets
have different elasticities of demand. It is meaningless to resort to
price discrimination if two separate markets have identical demand
curves, because under such conditions the total sales receipts will not
be affected by shifting the uniform price policy.
Dumping by a foreign competitor is obviously condemned by the
domestic producer when the foreign competitor captures their market
by selling below cost price.
Hence, competing home producers strongly react to any suspicion that
a foreign exporter has resorted to dumping. As an anti-dumping
measure, thus, a tariff wall has to be erected by the country concerned.
There are, however, two major forms of dumping-persistent and
sporadic. Persistent dumping is adopted on a long-term basis, in the
context of different market conditions in the two countries.

Its basic goal is to facilitate large-scale production. Under persistent

dumping, importers benefit by low-price imports; so unless there is
the infant industry argument, there is no need for a protective tariff in
such case. Persistent tariff, however, is harmful to the exporting
country as it exploits domestic consumers for the sake of foreign
buyers. But if export promotion is to be given priority and dumping
facilitates economies of large-scale production, there is no valid
reason for resentment against such dumping.
Persistent dumping is the continuous tendency of a domestic
monopolist to maximize total profits by selling the commodity at a
higher price in the domestic market than internationally
Sporadic dumping is occasionally adopted, especially to dispose of a
casual stock. Predatory dumping is adopted to ruin rival firms and to
achieve monopoly power by selling even at a loss in the foreign
market.
Once the object is realized, predatory dumping is immediately
followed by a price rise. Similarly, intermittent dumping is adopted to
maintain a foothold in the market, or to develop goodwill in a new
market. Since sporadic dumping is harmful to both the local producers
as well as consumers in effect, it must be prevented through a
protection tariff. The duty so imposed must be high enough to
equalize the selling price of the dumped goods with that of domestic
goods.

Anti dumping
Anti dumping is a measure to rectify the situation arising out of the
dumping of goods and its trade distortive effect. Thus, the purpose of
anti dumping duty is to rectify the trade distortive effect of dumping
and reestablish fair trade. The use of anti dumping measure as an
instrument of fair competition is permitted by the WTO. In fact, anti
dumping is an instrument for ensuring fair trade and is not a measure
of protection for the domestic industry. It provides relief to the
domestic industry against the injury caused by dumping.
Anti dumping measures do not provide protection per se to the
domestic industry. It only serves the purpose of providing remedy to
the domestic industry against the injury caused by the unfair trade
practice of dumping.

Anti dumping is a measure of protection for domestic industry.

However, anti dumping measures do not provide protection per se to
the domestic industry. It only serves the purpose of providing remedy
to the domestic industry against the injury caused by the unfair trade
practice of dumping.
In fact, anti dumping is a trade remedial measure to counteract the
trade distortion caused by dumping and the consequential injury to the
domestic industry. Only in this sense, it can be seen as a protective
measure. It can never be regarded as a protectionist measure.
Anti dumping and customs duties.
Anti dumping duty is levied and collected by the Customs Authorities,
it is entirely different from the Customs duties not only in concept and
substance, but also in purpose and operation. The following are the
main differences between the two: -

 Theoretically, anti dumping and similar measures aim at fair

trade. The objective of these duties is to guard against the
situation arising out of unfair trade practices while customs
duties are there as a means of raising revenue and for overall
development of the economy.
Customs duties come under trade and fiscal policies of the
Government while anti dumping and anti subsidy measures are
there as trade remedial measures.
The object of anti dumping and allied duties is to offset the
injurious effect of international price discrimination while
customs duties have implications for the government revenue
and for overall development of the economy.
Anti dumping duties are not necessarily in the nature of a tax
measure inasmuch as the Authority is empowered to suspend
these duties in case of an exporter offering a price undertaking.
Thus such measures are not always in the form of duties/tax.
Anti dumping and anti subsidy duties are levied against
exporter / country inasmuch as they are country specific and
exporter specific as against the customs duties which are
general and universally applicable to all imports irrespective of
the country of origin and the exporter.
Thus, there are basic conceptual and operational differences
between the customs duty and the anti dumping duty. The anti
dumping duty is levied over and above the normal customs duty
chargeable on the import of goods in question.

Subsidies
Protection to home industries is also granted by giving subsidies to the
domestic producers. Especially when the cost of production is high and
domestic producers are incapable of either competing with foreign goods or
sell goods at a cheaper rate, the government may give them subsidies in the
form of tax exemption, development rebate or tax remittance or a segment of
the cost of production may also be borne by the state.
Further, in order to encourage exporters, they may be given export bounties.
Export bonuses or bounties in effect artificially bring down the domestic
price of goods to be exported; hence exporters will be in a position to sell
them at low prices in the foreign market, thereby, stepping up exports.
Generally, all subsidies and bounties tend to reduce imports and increase
exports, but eventually they cause diversion of resources from more efficient
to less efficient uses.
Export subsidies cost the Government heavy expenditure. Every U.S. citizen
pays approximately $13 per year to support cotton production in the U.S.
These subsidies to cotton producers encourage additional production beyond
the scale of the original market for cotton thereby creating surpluses.

Export subsidies work in the opposite of tariffs. A subsidy as ad velorem

increases the price for domestic producers and consumers. Increased price,
increases supply and decreases demand. In the process the volume of exports
increases. The domestic producers are benefited due to increase in price as
well as increasing exports.
In 2007, EU sugar subsidies made them the second-largest exporter of sugar.
Due to this Mozambique sugar farmers had a difficult time competing in
world sugar markets despite their lower production costs because the EU
subsidies artificially lower the world price of sugar. Like Europe and East
Asia, the United States has used export subsidies to help some industries.

To counteract the export subsidies of a foreign government, the importing

country may impose import duties and thereby, convert subsidies of the
exporting country into customs revenue (for the importing country). Doha
Round of WTO negotiations discussed the possibility of eliminating
agricultural subsidies altogether, and, at the Hong Kong Meeting in
December 2005, member countries agreed to abolish all agricultural export
subsidies by 2013.
Export subsidies are attempts by the government to interfere with the free
flow of exports. They are payments to a firm or individual for shipping a
good abroad. Similar to taxes, export subsidies can be specific (a fixed sum
per unit) or ad valorem (a proportion of the value exported). Around the
world, the export industry most frequently subsidized is agriculture.
The stated reasoning for export subsidies varies depending upon the product
and industry, but proponents frequently invoke the notion of selfsufficiency
or national security concerns. When effective, export subsidies reduce the
price of goods for foreign importers and cause domestic consumers to pay
relatively higher prices. They thus distort the pattern of trade away from
production based on comparative advantage and, like tariffs and quotas,
disrupt equilibrium trade flows and reduce world economic welfare.

Voluntary export restraint

A voluntary export restraint is a government imposed limit on the quantity
of goods that can be exported out of a country during a specified period of
time.
Normally voluntary export restraint arises when the import-competing
industries seek protection from inflow of imports from particular exporting
countries. Voluntary export restraint s are then offered by the exporter to
appease the importing country and to prevent the other country from
imposing even more trade barriers.
Voluntary export restraints can be imposed on bilateral basis, that is, on
exports from one exporter to one importing country.
Voluntary export restraints have been used since the 1930s at least, and have
been applied to products ranging from textiles and footwear to steel,
machine tools, and automobiles. They became a popular form of protection
during the 1980s, perhaps in part because they did not violate countries'
agreements under the GATT.
In 1994, World Trade Organization (WTO) members agreed not to
implement any new voluntary export restraints and to also to abolish
existing voluntary export restraints over a four year period. Exceptions can
be granted for one sector in each importing country.

International Cartels
An international cartel is formed by producers in the same line of production
in two or more countries, agreeing to regulate production and sales for
monopolistic ends.
A cartel is a group of formally independent producers whose goal it is to fix
prices, to limit supply and to limit competition. Cartels are prohibited by
antitrust laws in most countries; however, they continue to exist nationally
and internationally, formally and informally Haberler defines international
cartels more precisely as
"A union of producers in a given branch of industry, of as many
countries as possible, into an organization to exercise a single planned
control over production and price and possibly to divide markets between
the different producing countries."
Thus international cartels are a sort of monopoly combines to eliminate
competition in the foreign markets. Cartel members usually form an
organized association through explicit agreements which would ensure them
higher profits than would be possible otherwise.
In general, cartels are economically unstable in that there is a great incentive
for members to cheat and to sell more than the quotas set by the cartel. This
has caused many cartels that attempt to set product prices to be unsuccessful
in the long term. Empirical studies of 20th century cartels have determined
that the mean duration of discovered cartels is from 5 to 8 years.
De Beers diamond cartel and the Organization of the Petroleum Exporting
Countries (OPEC) are permanent cartels.
Indeed, the scope of cartels is wide enough covering metals and minerals,
and manufactured goods like chemicals, dyestuffs, pharmaceutical products
and electrical goods.

The main inducing factor behind the formation of cartels is the fear of
cutthroat competition and desire for monopoly control. Further, when
productive capacity is found to exceed current demand, international cartels
have been formed as an attempt to share a diminished market.
Krause points out the following important objects of cartels:
1. To achieve control over prices Cartels resort to price-fixing above
competition price and reap high monopoly profits.
2. To impair the quality of product. When cartels are formed, buyers will
have no safeguards against low quality, since hardly an opportunity is
made available to the buyers to choose between different varieties.
3. To make allocation of trade territories and thereby to acquire and
maintain a monopolistic position by each cartel member in their
respective allocated- markets.
4. To restrict supply, assigning quotas to each cartel member.
5. To deliberately retard technological change until the existing plants
and productive facilities have been fully depreciated.
International cartels seem to have the following merits:
1. Due to business combines, large-scale output is made possible,
so goods may be sold at cheaper rates through cartels.
2. Cartels tend to eliminate wasteful competition also.
3. Cartels can solve the problem of excess capacity.
However, the cartels have the following drawbacks:
1. They tend to reduce international trade on account of
restricted output and high price policy.
2. International cartels may also mean under utilization of the
world's resources and manpower, in view of lack of
competition and the system of production quotas followed
by the cartel members.