4.1 - Restrictions on free trade Flashcards
4.1 - International economics
What is the aim of free trade?
- Aims to maximise global output based on the principle of comparative advantage
What is protectionism? How might it take form?
- restrictions on free trade
> limiting imports, boosting exports, putting administrative barriers in place
What are some reasons for restrictions on free trade?
> Infant industries
- are ones that just being established within a country.
- They need to be able to build up a reputation and customer base
and will have to cover a lot of start up costs, meaning their Average costs will be higher.
- Therefore,
the industry would be unable to compete in the international market
- restrictions protect them until they are able to compete on an equal level.
> Sunset industries
- are declining industries which will likely become extinct
- restrictions support them to limit the economic damage that would occur if they closed abruptly
> Strategic industries
- eg: energy, defence, agriculture are essential to self-sufficiency and security
- restrictions help eliminate possible vulnerabilities nations may face if they become reliant on other countries for these.
> Protection from dumping
- occurs when foreign firms with a surplus of goods sell these goods at low prices ( usually below normal costs of production )
- harming domestic firms in these countries - unable to compete
> Employment
- when firms outsource production to other countries or domestic industries are out-competed in the global market,
- restriction protect domestic firms and so jobs
> Current account deficit
- when imports>exports
- amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms.
- protectionism can help correct this imbalance
> Labour/environmental regulations
- many countries offer cheap labour and low cost production due to poor environmental regulations
- protectionism can apply pressure to bring about change in these countries
- protects domestic firms from unfair competition.
What are the types of restrictions on free trade?
- tariffs
- quotas
- subsidies to domestic producers
- non-tariff barriers
What is a tariff?
= Tax on imported goods/services (customs duty)
How do tariffs work?
- Domestic producers/retailers have to pay the tariff when g/s crosses the border into country
- this raises costs of production for domestic firms
- firms often pass on the increased costs to consumers in the form of higher prices
- higher prices allow some domestic firms to increase their output (law of supply)
- more inefficient firms domestic firms are now producing at the expense of efficient firms globally who reduce their output exported to country with tariff as demand contracts (higher prices)
- increases demand for domestic g/s - increases their output - can increase employment.
What is a quota?
= a physical limit on imports
- limit usually set below free market level of imports
How do quotas work?
- Quotas cause cheaper imports to be limited
- so a quota raises market price ( causing a shortage of cheap imports )
- Domestic firms benefit as they are able to supply more due to lower level of imports
- increase output/employment/economic growth
What is a subsidy?
- Amount of money paid to a firm by the government for each unit produced ( financial aid )
How do subsidies work?
- lowers costs of production for domestic firms
- so they can increase output and lower prices
- lower prices make them more competitive internationally
- level of exports increases
- increased output - increased living standards/growth/employment
What is a non tariff barrier and what are some examples?
- strategies that are used to create barriers to trade using less obvious methods than tariffs, quotas, subsidies
> health and safety regulations
product specifications
environmental regulations
product labelling requirements
What are impacts of tariffs on domestic producers?
- domestic producer surplus
> use tariff diagram
> show how revenue has increased
What are the impacts of tariffs on domestic consumers?
- domestic consumer surplus decreased
> use diagram to show
> consumers consumer fewer products at higher price
What are impacts of tariffs on government?
- receive government revenue
> show on diagram
What are impacts of tariffs on standards of living?
- for consumers, standards of living worsen as value of their income is eroded as they are paying higher prices
- domestic firms who benefit from increased production may increase employee’s wage/ hire more workers
> increase standards of living for employees/reduce unemployment
What are the impacts of tariffs on equality?
- workers in industries that have experienced structural unemployment due to foreign competition will feel tariff increases equality
- increases wages - reduces income inequality
What are the impacts of quotas on domestic producers?
> reduces supply of cheap imports competition which…
- Increases their output
- Raises the selling price
- increases their revenue
What are impacts of subsidies on domestic producers?
- decreases costs of production
- increases output
- increases international competitiveness
What are impacts of Non-tariff barriers on domestic producers?
- limits foreign competition
- protects levels of output
- may increase selling price and revenue
What are impacts of quotas on foreign producers?
- decreases their output
- compared to a tariff, firms who manage to export in quota receive a higher price for their sales
What are the impacts of subsidies on foreign producers?
- Makes it harder for them to compete with domestic firms
What are the impacts of non-tariff barriers on domestic firms?
- acts as disincentive to sell into foreign markets
- costs of meeting the non-tariff barriers may significantly reduce profit margins
What are the impacts of quotas on consumers?
- higher prices
- less choice
What are the impacts of subsidies on consumers?
- lower prices
What are the impacts of non-tariff barriers on consumers?
- may reduce choice/variety in a market
What are the impacts of quotas on government?
- do not tariff revenue
- may receive higher tax revenue at end of financial year when domestic firms pay their corporation tax
What are the impacts of subsidies on government?
- costs government amount of the subsidy (gov budget deficit?)
- opportunity cost associated with every subsidy provided
What are the impacts of non-tariff barriers on government?
- may lose credibility with WTO
- enforcing non-tariff barriers may be time consuming/expensive or difficult
What are the impacts of quotas on standards of living?
- reduces for consumers as higher prices erode purchasing power of their income
What are impacts of subsidies on standards of living?
- improves for consumers as they benefit from lower prices ( increases purchasing power of their income )
- however could result in less government spending…
What are the impacts of non-tariff barriers on standards of living?
- less choice and higher prices erode standards of living
- product labelling info may improve decision making and quality of life (less info gap)
What are the impacts of quotas on equality?
- improves for domestic firms and worsens for foreign firms
What are the impacts of subsidies on equality?
- domestic firms can compete more equally
- wages may increase ( less income inequality )
What are the impacts of non-tariff barriers on equality?
- may help improve equality
> reduce information gap
> environmental standards help create equal production inputs which results in equality in the costs of production
and put pressure on foreign firms to improve working conditions of workers
