4.1.6 Restrictions on free trade Flashcards
What would be the reasons for putting restrictions on Free trade
- infant industry argument
- Sunset Industry Arguement
- Diversify Industry Arguments
- Raise Tax revenues
- Improve the trade balance
- Prevention of unfair trade practices such as import dumping
- Protect Strategic industries
Explain the reasoning behind the infant industry argument
protecting emerging industries until they have achieved economies of scale
Explain the reasoning behind the Sunset industry argument
use tariffs to slow the decline of old sectors and limit structural unemployment
Explain the reasoning behind diversifying an economy
Thought to be too dependent on one product
What is import dumping
where excess output is sold in another country at a price below costs of production
Explain the reasoning behind protecting strategic industries
might include national defence, electric generation and supply of basic food stuff
Give a recent example of dumping
global steel industry
China’s steel industry is experiencing significant excess capacity and China has been accused of dumping its steel products on the European Union, selling them for less than they are worth.
That makes it harder for EU steel producers to compete
What is done by importing countries in response to dumping
Anti-dumping duties or tariffs raise the price of a product to help protect local producers
Explain the three types of Anti-dumping tariffs
- Ad Valorem duty - is a percentage of a goods price (most common)
- Specific duty - fixed amount
- A variable duty - a minimum import price - no duty is paid if the price is higher than EU’s MIP
What is an import quota
A physical limit on the quantity of a good that can be imported into a country
What is an import tariff
A tax on imports that may be AD Valorem (%) or a specific tax
What is a non-tariff barrier
Trade barriers such as import quotas, environmental regulations, trade embargoes and export subsidies
What is Rules of Origin
Rules on the nation source of a product
What is a Domestic subsidy
Payments by the Government to suppliers that reduce their costs
It will increase supply and decrease market price
What is a likely impact on domestic output, of an import tariff
Expansion
Higher prices from the import tariff incentivizes expansion of output
Domestic output shifts from (Q1-Q5) to (Q5-Q2)
What is the likely impact on domestic demand, of an import tariff
Contraction
Higher prices reduces the real income of domestic consumers
Shifts from Q3 to Q4
What is the likely impact on imports, of an import tariff
Fall in volume
Tariff causes expenditure switching towards domestic production
Demand above the tariff line lost
What is the likely impact on Government tax revenue, of an import tariff
Increase
Tariff revenue generates revenue for the Government
What is the likely impact on Domestic producer revenue, of an import tariff
Increase
A rise in producer surplus
Output moves from (Q1-Q5) to (Q5-Q2)
What would the impact of Foreign producer revenue, of an import tariff
Falls
They are selling fewer exports
What happens to consumer surplus, due to an import tariff
Falls
Consumers hit by higher prices
Shifts from area under P1 to area under pw+tariff
What happens to overall economic welfare due to an import tariff
Falls
There is a deadweight loss of welfare/loss of economic efficiency
Describe the graph for a tariff
What is the likely impact of a quota
Limits supply of imported products
Price of imported goods is likely to rise
Black markets may develop
What is the likely impact on domestic output and domestic producer revenue, of a quota
Output: increase - A higher price makes it more profitable for domestic suppliers to enter the market
Revenue: Increase - Selling increased output at higher prices
What is the likely impact on domestic demand, of a quota
Contracts - Because the quota reduces the quantity of imports available
What is the likely impact on foreign producer revenue, of a quota
Falls - quotas cap how much can be exported into the protected market
What is the likely impact on consumer surplus, of a quota
Falls - fall in demand due to higher prices
What is the overall impact on welfare of a Quota
Falls
Quota restricts free trade and leads to deadweight loss of economic welfare
Analyse the effect on domestic producers of a quota
(talk about efficiency)
Domestic producers benefit from the cap on imports – this increases the market price and makes it more profitable for them to stay in / enter the market
Might encourage domestic firms to become less productively efficient
Some producers hampered by scarce supply of higher quality overseas imports – hurts their competitiveness
Analyse the effect on consumers of a quota
Consumers likely to face a higher price in the market because of limit on import products.
Less competition in the market might also affect the quality of products available
Consumers who work for domestic firms may benefit from higher employment and wages
Import cap might stimulate increased investment in alternatives
Analyse the effect on the Gov of quotas
Improved external balance from the reduction in imports and an expansion of GDP from the increase in domestic production
No immediate tax revenues from an import quota - a contrast with an import tariff
What is the impact of a domestic subsidy
form of government financial help to domestic businesses
subsidy helps firms to lower their costs and thus become more competitive in home and overseas markets
incentives to sell products in overseas markets at a profit
Analyse the impact on domestic producers of a domestic subsidy
What are this risks associated with subsidies
Domestic producers gain from the subsidy – they get the world price + a subsidy payment
Higher revenues will lift profits and might therefore lead to a higher share price.
Increased output creates the possibility of economies of scale
Risk of a dependency culture emerging
Analyse the impact on consumers of a domestic subsidy
not a direct effect on the prices that consumers pay for their products
They may face higher taxes if expensive subsidies take up a high percentage of government spending
Analyse the impact on Gov of domestic subsidy
Subsidy can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production
Unlike a tariff, a subsidy does not generate tax revenues directly.
Increased spending on subsidies may then cause a growing budget deficit
Name some types of non-tariff barriers
- Intellectual property laws e.g. patents and copyright protection
- Technical barriers to trade including labelling rules and stringent sanitary standards
- Preferential state procurement policies – where government favours local producers
- Domestic subsidies – aid for domestic businesses facing financial problems
- Financial protectionism – e.g. when a government instructs banks to give priority when making loans to domestic businesses
- Managed exchange rates
What are the main arguments against protectionism
- Resource misallocation – leading to a loss of economic efficiency
- Dangers of retaliation (like trade wars)
- Potential for more corruption
- Higher prices for domestic consumers
- Increased input costs for home producers – this damages competitiveness
- Barrier to entry – protectionism reduces market contestability
Analyse the impact on domestic consumers of a tariff
Producers benefit from import tariff – through being protected from lower-priced imports and can expect an increase in output at a higher price which increases their revenues and operating profits
Possible X-inefficiencies because of reduction in intensity of market competition
Other producers affected which depend on the goods being imported
Analyse the impact on foreign production, of a tariff
Import tariff is a barrier to trade and squeezes demand leading to lower revenues and profits
Producers may be able to shift production/exports to countries or regions where import tariffs are lower
Analyse the impact on consumers, of a tariff
Consumers face higher prices after the tariff – leading to a fall in real incomes + less consumer choice
depends on the price elasticity of demand for the affected product
Analyse the impact on Gov, of a tariff
Government tax revenues rise initially from having import tariffs – rising GDP and increasing profitability of suppliers
Adverse effects of possible retaliatory tariffs on other industries. Slower economic growth from
higher inflation.
