4.1.6 - Restrictions on free trade

Question 1

What is free trade ?

Answer 1

Free trade is international trade without restrictions such as tariffs

• Developed countries

Question 2

What is protectionism ?

Answer 2

The policy of restricting imports through trade restrictions

• Developing countries

Question 3

Why do countries use trade restrictions ?

Answer 3

National security

Public safety

Tax revenue

Protect domestic industries

Retaliation

Prevent dumping

Question 4

Why do countries use trade restrictions ? (National security)

Answer 4

A country may prevent goods and services from entering the country if it believes there is a risk to national security

• Normally in times of war

Question 5

Why do countries use trade restrictions ? (public safety)

Answer 5

Some goods and services pose a danger to public health.

A country may decide to ban or restrict products as a result.

Question 6

Why do countries use trade restrictions ? (tax revenue)

Answer 6

Administrating tariffs is far easier than other taxes such as income taxes.

This is especially the case in developing countries because they tend to be agricultural and have large informal sectors.

Question 7

What will be the effect of decreasing tariffs on a developing country ?

Answer 7

It will have a big impact on government revenues as they are dependent on tariff revenue from developed countries

Question 8

Why do countries use trade restrictions ? (protecting domestic industries)

Answer 8

A tariff makes imports more expensive.
Products made by domestic firms become more attractive as a result: there is less competition for these firms.

Trade restrictions can therefore act in the interests of domestic firms.

Question 9

What is an infant industry ?

Answer 9

An industry new to a country, but already established in other countries

Question 10

What does the infant industry argument say ?

Answer 10

The infant industry argument holds that such industries need protection from competition in their beginning stages.

Therefore, protecting these industries during development is justifiable for proponents of the infant industry argument.

Question 11

What is a downside of a tariff ?

Answer 11

Higher prices for consumers (ALWAYS)

Reductions in efficiency due to the restriction of competition

Question 12

Why do countries use trade restrictions ? (retaliation)

Answer 12

1. To punish the other country.
2. To convince the other country to remove trade restrictions
3. To serve as a warning to other countries.

Question 13

What is dumping ?

Answer 13

This is when an exporter sells below production costs

Question 14

Why may a firm dump ?

Answer 14

• One reason a firm may do this is excess capacity or a failure to find a buyer.
• To sell this stock firms resort to selling below production costs.

Question 15

Why may international firms dump abroad ?

Answer 15

• Another reason is that foreign firms may aim to drive out domestic competition.
• By selling at artificially low prices, foreign firms hope to put domestic firms out of business.
• Once the domestic competition has been eliminated foreign firms can dominate the market (and potentially raise prices).
• This will have negative effects for a country’s economy in terms of employment and GDP.

Question 16

What does the anti dumping argument say ?

Answer 16

If a country suspects that a trading partner is practising dumping, it should have the right to impose tariffs or quotas in order to limit imports of the dumped good.

Question 17

What is a tariff ?

Answer 17

It is a tax on imports or exports

Mostly on imports and on an ad valorem basis

Question 18

What is a quota ?

Answer 18

A quota is a limit on the number of imports allowed for a product in a country

They are often

Question 19

What is the rationale behind quotas ?

Answer 19

The rationale for a quota is to protect domestic firms by restricting imports

Question 20

Why may a country give subsidies to domestic producers ?

Answer 20

One is to encourage firms to grow in size thereby allowing them to compete on a global scale.

Furthermore, they enable producers to lower production costs thus making their products more competitive (both nationally and internationally).

Question 21

What is an embargo ?

Answer 21

An official ban on trade or other commercial activity with a particular country

Question 22

Give an example of a restriction a country can place on the import of international goods

Answer 22

Increase the amount of paperwork required to import a good.

This will increase production costs for importers.

The speed they can deliver goods may also increase if this paperwork leads to delays at customs borders.

Question 23

What are administrative barriers ?

Answer 23

A procedure or legal requirement that can inhibit trade if set in an arduous manner

e.g. excessive paperwork required to import

Question 24

What is a detractor ?

Answer 24

A person who disparages someone or something

Disparage: regard or represent as being of little worth.

Question 25

What is an evangelist ?

Answer 25

An enthusiastic advocate

Question 26

What must firms do for protectionism to be effective ?

Answer 26

Firms must be required to earn the support they receive.

If firms receive state protection unconditionally, the result is stagnation and waste because firms can earn profit without innovating.

Question 27

What is export discipline ?

Answer 27

It refers to what happens to different states regarding their export performances

Those which are succeeding can be rewarded through further support e.g. subsidies.

Failing firms can face punishment such as reduced (or even removed) support or ultimately bankruptcy.

Question 28

What is the impact on producers if they receive state support ?

Answer 28

They gain an advantage over foreign competitors as they could have more capital and support than other firms that do not have this support

Question 29

What is likely to happen if state support is given unconditionally to firms ?

Answer 29

They are like to become inefficient and fail to progress - they are too overdependent on the state support and let inefficiency creep in

Question 30

What is the effect on consumers from protectionist measures ?

Answer 30

They are like to suffer

• Embargos and Quotas reduce choice for consumers
• Tariffs make goods more expensive

Question 31

What can be the effect on workers from protectionist measures ?

Answer 31

Workers in industries that receive protection benefit from increased job security and potentially higher wages

If protectionist measures make raw materials and components more expensive, the final good produced will also become more expensive. Firms may reduce output as a result thereby reducing the need for labour

Question 32

What is the impact on governments from protectionist measures ?

Answer 32

For developing countries, tariffs are a larger source of government revenue. Protectionism thereby serves an important purpose in providing funding for running a state.

In developed countries, protectionist measures can be used to win political support and protect industries deemed strategically important.

Question 33

What are domestic producers said to be in their home markets ?

Answer 33

Price makers

Question 34

What are producers said t be in the international market ?

Answer 34

Price takers

Question 35

What is an autarky ?

Answer 35

A policy of self sufficiency and non reliance on imports or economic aid