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The distribution of vital natural resources on the earth is unequal. Countries have varying climates, resource endowment and topography which may sustain some (but not all) of the goods and services necessary for survival. Trade compensates for these differences, leading to improvements in allocative efficiency and increased world production, thus allowing individuals to consume a larger and more diverse collection of goods and services. Despite these advantages, trade protection is still common among governments. Trade protection takes the form of tariff and non-tariff barriers. The traditional arguments in favour of protection are critically evaluated and so to are the new protectionist theories which have received fresh attention in the literature recently (Brander and Spencer, 1987; Krugman 1987; Grilli et al., 1990; Salvatore, 1987). Forms of Protection Tariffs are a tax levied on imports to restrict their inflow by raising their price. Higher prices encourage domestic firms to expand production; thus tariffs also serve as a domestic subsidy. A partial equilibrium analysis of the effects of a tariff is given below. Figure 1 Effects of a Tariff Adapted from Vousden (1990, 29) Before the tariff, the price of the good is PW; hence the quantity demanded is q5 (Figure 1). The amount of the good produced domestically is q1; therefore this country would have to import q1 to q5.
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