International Trade Policy

International trade can provide benefits while creating a threat to the economy of a country. To protect themselves, then a country usually implements a policy that can benefit, at least for the country itself.

Protection Policy

1. Understanding Protection Policies
Protection policy is a government policy to protect domestic industries that are growing (infant industry), and protect new companies from large companies from unfair competition, also protect from competition from imported goods. Newly established domestic industries usually have a high cost structure, making it difficult to compete with foreign industries that have a low cost structure (because they already have large economies of scale). This protection provides an opportunity for the domestic industry to learn more efficiently and provides an opportunity for workers to acquire skills. Protection policies are usually temporary. If at any time the domestic industry is felt to be big enough and able to compete with foreign industries, then the protection will be revoked.

2. Protection in International Trade consists of policies:

a. Tariff

International trade policies in the import sector can be grouped into two types, namely tariff barriers and non-tariff barriers.
  • Tariff Barriers
Tariff barrier (tariff barrier) is a protectionist policy for goods produced in the country from the threat of a flood of similar goods imported from abroad. Tariffs are trade barriers in the form of taxation on imported goods or merchandise that cross customs areas. Meanwhile, goods entering the territory of the country are subject to import duties. The effect of this policy is seen directly in the increase in prices of goods. With the imposition of large import duties, state revenues will increase while limiting consumer demand for imported products and encouraging consumers to use domestic products.
  • Non-Tariff Barriers
Non-tariff barriers are various trade policies other than import duties that can cause distortion, thereby reducing the potential benefits of international trade.

Reasons for charging:
            1. Improve the basis of exchange
Imposing tariffs can reduce the desire to import. This means that for a certain number of exports requires a greater number of imports, a part of it is left to the government as a tariff payment.
            2. Infant-industry
The imposition of tariffs for goods from abroad can provide protection for this growing domestic industry.
            3. Diversification
The imposition of domestic industry tariffs can develop so that it can increase the number and types of goods produced, especially by countries which only produce one or a few kinds of goods.
            4, Employment
The imposition of tariffs causes a decrease in imports and increases domestic production.
            5, Anti dumping
Imposing tariffs on goods originating from countries that carry out dumping politics so that they are not affected by the politics worse.
            6. To keep money at home
Imposing import tariffs, then imports will be reduced so that it will prevent the flight of money abroad.
            7. The low-wage
A country with a high level of wages cannot establish a relationship with a country with a low level of wages without taking the risk of falling wage levels. To protect workers whose wages are high from the competition of workers whose wages are low, the country with high wages needs to charge tariffs for goods originating from countries with low wage rates.Ban on imports

b. Quota
Quotas are a form of trade barriers that determine the maximum amount of goods that can be imported in a certain period or government policy to limit the amount of goods traded. Similar to tariffs, the effect of quotas imposed causes the prices of imported goods to be high because the number of goods is limited. This can occur because of the limitation on the number of imported goods, causing the average cost for each item to increase. Thus, the enactment of quotas can protect domestic goods from competition of foreign goods.

c. Ban on imports
Import prohibition is a government policy that prohibits the entry of certain goods or foreign products (into the domestic market) into the country. The import ban policy is carried out to avoid goods that can harm the community. For example banning the import of beef containing Anthrax disease. This policy is usually carried out for political and economic reasons.
Basically there are three targets of the import ban policy, namely:
            1. Environmental-oriented import prohibition policy
                The government of a country can prohibit the importation of certain products if the product is harmful to humans, animals or plants in a country, or because the product is the result of exploitation of natural resources to damage the ecological balance.

            2. Import prohibition policy to protect domestic industries
                Countries are expected to be able to make adjustments to certain products that face pressure originating from the import of goods caused by competition or international competition. Safeguards measures are temporary and are solely carried out within the framework of the process of adjustment for domestic industries that are facing pressure. Safeguards measures cannot be used to protect the domestic industry in the long run.

            3.Maintaining Balance of Payments
If the WTO member country faces balance of payments (BOP difficulties), then the member country can impose restrictions on trade in services that lead to commitments including payments or transfers related to the commitments.

 d. Subsidy

With subsidies, domestic producers can sell their goods cheaper, so they can compete with imported goods.
Subsidies can take various forms, for example:
1) Direct subsidies in the form of a certain amount of money
2) Subsidies per unit of production.

 e. Dumping
Dumping is a policy carried out by a country by selling goods abroad cheaper than selling domestically or even below production costs. Dumping policies can increase trade volumes and benefit importing countries, especially for their consumers.

3. Factors that encourage protection
In foreign trade, the concept of protection means government efforts that limit or reduce the amount of goods imported from other countries with the aim of achieving certain objectives that are important in the development of the country and the prosperity of the country's economy. 
There are several important objectives of protection:
 a. Overcoming the problem of deflation and unemployment.
 b. Encourage the development of new industries
 c. Diversify the economy
 d. Avoid the deterioration of certain industries
 e. Improve the balance of payments
 f. Avoid balance of payments
 g. Avoid dumping
 h. Increase government revenue

4. The objectives of the protection policy are:
Maximizing domestic production.
 a. Expanding employment.
 b. Maintaining traditional.
 c, Avoiding risks that might arise if you only rely on one reliable commodity.
 d. Maintain national stability, and not rely on other countries.

5. Protection Concepts and Practices
Protection includes tariffs and non-tariffs through import duty tariffs, classified into two types, namely nominal rates and effective tariffs. The nominal tariff is stated to be several% of the import value (FOB), while the effective tariff is calculated by knowing in advance the value added of a commodity, which can be created domestically and the added value of the commodity on the international market. Then, calculate the percentage difference. 

Non-tariff protection can take the form of import prohibitions, import restrictions, administrative obstacles, and import licenses. This tariff and non-tariff policy relates to other economic variables, such as government income, prices of domestic goods, including raw materials, domestic and foreign exchange rates, production technology, employment opportunities, and also related with agricultural sector production and industrial efficiency.

The relatively high tariff level for consumer goods will reduce competitiveness, while for raw materials, will lead to relatively high prices, and difficult to gain competitiveness. Within a certain time limit protection can encourage economic growth, but if it continues to be detrimental to the domestic economy because every commodity will experience a period of saturation. Domestic production is relatively more available, while the price is relatively expensive, the purchasing power does not increase as expected. This can lead to a higher state of under-capacity, and further encourage a high cost economy.

In various cases in Latin American countries and other developing countries, protection also creates market concentration and monopoly, and in Pakistan, it also puts pressure on the agricultural sector, and in the United States 1978-1982, it has reduced employment opportunities by 40% in industry the car needed protection from foreign rivals. High protection can cause domestic currency to be over-valued.

6. Measuring the amount of protection
Tariffs on imported goods increase the prices of goods produced by domestic producers. This impact is often the main objective of tariffs to protect domestic producers against cheaper import competition. In analyzing trade policies found in reality, it seems important to know the amount of protection from tariffs or other trade policies that are actually given to an industry. The amount of protection is usually expressed as a percentage of the prevailing price if the trade takes place freely. Limiting sugar imports, for example, can increase the price obtained by American sugar producers by 45 percent.

Such a cursory measurement seems to be a clear measurement in the case of tariffs: if the type of tariff is in the form of an ad valorem tax which is proportional to the value of imports, the tariff level itself necessarily measures the amount of protection; if the type of tariff is specific, dividing the rate by the net price after the tariff generates the same number as the ad valorem rate.

There are two problems in calculating the level of protection in the simple way above:
First, if the assumption of a small open country is an accurate consideration, partly the impact of tariffs will reduce export prices and partly in the form of increased domestic prices, and the impact of trade policies on export prices is sometimes very significant. In theory (although it rarely happens in reality) it could actually happen where tariffs can actually reduce the price received by domestic producers. Second, tariffs can have different effects at each stage of production of an item.