4.1 - Restrictions on free trade

Question 1

What is the aim of free trade?

Answer 1

• Aims to maximise global output based on the principle of comparative advantage

Question 2

What is protectionism? How might it take form?

Answer 2

• restrictions on free trade

> limiting imports, boosting exports, putting administrative barriers in place

Question 3

What are some reasons for restrictions on free trade?

Answer 3

> 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.

Question 4

What are the types of restrictions on free trade?

Answer 4

• tariffs
• quotas
• subsidies to domestic producers
• non-tariff barriers

Question 5

What is a tariff?

Answer 5

= Tax on imported goods/services (customs duty)

Question 6

How do tariffs work?

Answer 6

• 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.

Question 7

What is a quota?

Answer 7

= a physical limit on imports
- limit usually set below free market level of imports

Question 8

How do quotas work?

Answer 8

• 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

Question 9

What is a subsidy?

Answer 9

• Amount of money paid to a firm by the government for each unit produced ( financial aid )

Question 10

How do subsidies work?

Answer 10

• 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

Question 11

What is a non tariff barrier and what are some examples?

Answer 11

• 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

Question 12

What are impacts of tariffs on domestic producers?

Answer 12

• domestic producer surplus
  > use tariff diagram
  > show how revenue has increased

Question 13

What are the impacts of tariffs on domestic consumers?

Answer 13

• domestic consumer surplus decreased
  > use diagram to show
  > consumers consumer fewer products at higher price

Question 14

What are impacts of tariffs on government?

Answer 14

• receive government revenue
  > show on diagram

Question 15

What are impacts of tariffs on standards of living?

Answer 15

• 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

Question 16

What are the impacts of tariffs on equality?

Answer 16

• workers in industries that have experienced structural unemployment due to foreign competition will feel tariff increases equality
• increases wages - reduces income inequality

Question 17

What are the impacts of quotas on domestic producers?

Answer 17

> reduces supply of cheap imports competition which…
- Increases their output
- Raises the selling price
- increases their revenue

Question 18

What are impacts of subsidies on domestic producers?

Answer 18

• decreases costs of production
• increases output
• increases international competitiveness

Question 19

What are impacts of Non-tariff barriers on domestic producers?

Answer 19

• limits foreign competition
• protects levels of output
• may increase selling price and revenue

Question 20

What are impacts of quotas on foreign producers?

Answer 20

• decreases their output
• compared to a tariff, firms who manage to export in quota receive a higher price for their sales

Question 21

What are the impacts of subsidies on foreign producers?

Answer 21

• Makes it harder for them to compete with domestic firms

Question 22

What are the impacts of non-tariff barriers on domestic firms?

Answer 22

• acts as disincentive to sell into foreign markets
• costs of meeting the non-tariff barriers may significantly reduce profit margins

Question 23

What are the impacts of quotas on consumers?

Answer 23

• higher prices
• less choice

Question 24

What are the impacts of subsidies on consumers?

Answer 24

• lower prices

Question 25

What are the impacts of non-tariff barriers on consumers?

Answer 25

• may reduce choice/variety in a market

Question 27

What are the impacts of quotas on government?

Answer 27

• do not tariff revenue
• may receive higher tax revenue at end of financial year when domestic firms pay their corporation tax

Question 28

What are the impacts of subsidies on government?

Answer 28

• costs government amount of the subsidy (gov budget deficit?)
• opportunity cost associated with every subsidy provided

Question 29

What are the impacts of non-tariff barriers on government?

Answer 29

• may lose credibility with WTO
• enforcing non-tariff barriers may be time consuming/expensive or difficult

Question 30

What are the impacts of quotas on standards of living?

Answer 30

• reduces for consumers as higher prices erode purchasing power of their income

Question 31

What are impacts of subsidies on standards of living?

Answer 31

• improves for consumers as they benefit from lower prices ( increases purchasing power of their income )
• however could result in less government spending…

Question 32

What are the impacts of non-tariff barriers on standards of living?

Answer 32

• less choice and higher prices erode standards of living
• product labelling info may improve decision making and quality of life (less info gap)

Question 33

What are the impacts of quotas on equality?

Answer 33

• improves for domestic firms and worsens for foreign firms

Question 34

What are the impacts of subsidies on equality?

Answer 34

• domestic firms can compete more equally
• wages may increase ( less income inequality )

Question 35

What are the impacts of non-tariff barriers on equality?

Answer 35

• 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