4.1.6 Restrictions on free trade

Question 1

What would be the reasons for putting restrictions on Free trade

Answer 1

1. infant industry argument
2. Sunset Industry Arguement
3. Diversify Industry Arguments
4. Raise Tax revenues
5. Improve the trade balance
6. Prevention of unfair trade practices such as import dumping
7. Protect Strategic industries

Question 2

Explain the reasoning behind the infant industry argument

Answer 2

protecting emerging industries until they have achieved economies of scale

Question 3

Explain the reasoning behind the Sunset industry argument

Answer 3

use tariffs to slow the decline of old sectors and limit structural unemployment

Question 4

Explain the reasoning behind diversifying an economy

Answer 4

Thought to be too dependent on one product

Question 5

What is import dumping

Answer 5

where excess output is sold in another country at a price below costs of production

Question 6

Explain the reasoning behind protecting strategic industries

Answer 6

might include national defence, electric generation and supply of basic food stuff

Question 7

Give a recent example of dumping

Answer 7

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

Question 8

What is done by importing countries in response to dumping

Answer 8

Anti-dumping duties or tariffs raise the price of a product to help protect local producers

Question 9

Explain the three types of Anti-dumping tariffs

Answer 9

1. Ad Valorem duty - is a percentage of a goods price (most common)
2. Specific duty - fixed amount
3. A variable duty - a minimum import price - no duty is paid if the price is higher than EU’s MIP

Question 10

What is an import quota

Answer 10

A physical limit on the quantity of a good that can be imported into a country

Question 11

What is an import tariff

Answer 11

A tax on imports that may be AD Valorem (%) or a specific tax

Question 12

What is a non-tariff barrier

Answer 12

Trade barriers such as import quotas, environmental regulations, trade embargoes and export subsidies

Question 13

What is Rules of Origin

Answer 13

Rules on the nation source of a product

Question 14

What is a Domestic subsidy

Answer 14

Payments by the Government to suppliers that reduce their costs

It will increase supply and decrease market price

Question 15

What is a likely impact on domestic output, of an import tariff

Answer 15

Expansion

Higher prices from the import tariff incentivizes expansion of output

Domestic output shifts from (Q1-Q5) to (Q5-Q2)

Question 16

What is the likely impact on domestic demand, of an import tariff

Answer 16

Contraction

Higher prices reduces the real income of domestic consumers

Shifts from Q3 to Q4

Question 17

What is the likely impact on imports, of an import tariff

Answer 17

Fall in volume

Tariff causes expenditure switching towards domestic production

Demand above the tariff line lost

Question 18

What is the likely impact on Government tax revenue, of an import tariff

Answer 18

Increase

Tariff revenue generates revenue for the Government

Question 19

What is the likely impact on Domestic producer revenue, of an import tariff

Answer 19

Increase

A rise in producer surplus

Output moves from (Q1-Q5) to (Q5-Q2)

Question 20

What would the impact of Foreign producer revenue, of an import tariff

Answer 20

Falls

They are selling fewer exports

Question 21

What happens to consumer surplus, due to an import tariff

Answer 21

Falls

Consumers hit by higher prices

Shifts from area under P1 to area under pw+tariff

Question 22

What happens to overall economic welfare due to an import tariff

Answer 22

Falls

There is a deadweight loss of welfare/loss of economic efficiency

Question 23

Describe the graph for a tariff

Answer 23

Question 24

What is the likely impact of a quota

Answer 24

Limits supply of imported products

Price of imported goods is likely to rise

Black markets may develop

Question 25

What is the likely impact on domestic output and domestic producer revenue, of a quota

Answer 25

Output: increase - A higher price makes it more profitable for domestic suppliers to enter the market

Revenue: Increase - Selling increased output at higher prices

Question 26

What is the likely impact on domestic demand, of a quota

Answer 26

Contracts - Because the quota reduces the quantity of imports available

Question 27

What is the likely impact on foreign producer revenue, of a quota

Answer 27

Falls - quotas cap how much can be exported into the protected market

Question 28

What is the likely impact on consumer surplus, of a quota

Answer 28

Falls - fall in demand due to higher prices

Question 29

What is the overall impact on welfare of a Quota

Answer 29

Falls

Quota restricts free trade and leads to deadweight loss of economic welfare

Question 30

Analyse the effect on domestic producers of a quota

(talk about efficiency)

Answer 30

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

Question 31

Analyse the effect on consumers of a quota

Answer 31

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

Question 32

Analyse the effect on the Gov of quotas

Answer 32

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

Question 33

What is the impact of a domestic subsidy

Answer 33

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

Question 34

Analyse the impact on domestic producers of a domestic subsidy

What are this risks associated with subsidies

Answer 34

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

Question 35

Analyse the impact on consumers of a domestic subsidy

Answer 35

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

Question 36

Analyse the impact on Gov of domestic subsidy

Answer 36

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

Question 37

Name some types of non-tariff barriers

Answer 37

1. Intellectual property laws e.g. patents and copyright protection
2. Technical barriers to trade including labelling rules and stringent sanitary standards
3. Preferential state procurement policies – where government favours local producers
4. Domestic subsidies – aid for domestic businesses facing financial problems
5. Financial protectionism – e.g. when a government instructs banks to give priority when making loans to domestic businesses
6. Managed exchange rates

Question 38

What are the main arguments against protectionism

Answer 38

1. Resource misallocation – leading to a loss of economic efficiency
2. Dangers of retaliation (like trade wars)
3. Potential for more corruption
4. Higher prices for domestic consumers
5. Increased input costs for home producers – this damages competitiveness
6. Barrier to entry – protectionism reduces market contestability

Question 39

Analyse the impact on domestic consumers of a tariff

Answer 39

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

Question 40

Analyse the impact on foreign production, of a tariff

Answer 40

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

Question 41

Analyse the impact on consumers, of a tariff

Answer 41

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

Question 42

Analyse the impact on Gov, of a tariff

Answer 42

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.