4.1.6 - restrictions on free trade

Question 1

state four types of restrictions on free trade

Answer 1

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

Question 2

define comparative advantage

Answer 2

Refers to the relative advantage that one country or producer has over
another. A country can benefit from specializing in and exporting the
product(s) for which it has the lowest opportunity cost of supply.

Question 3

define ad valorem tariff

Answer 3

An import tariff rate charged as percentage of the price.

Question 4

Countervailing
tariffs definition

Answer 4

An additional import tariff (tax) imposed on imported goods to offset subsidies provided to producers or exporters by the government of the exporting country.

Question 5

define creeping protectionism

Answer 5

A period of time where import tariff rates rise and where countries introduce
quotas and barriers to the mobility of labour and capital.

Question 6

define dumping

Answer 6

When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below average costs of production

Question 7

define protectionism

Answer 7

Tariff and non-tariff restrictions on imports to protect domestic producers.

Question 8

define quota

Answer 8

A quota is a trade barrier that imposes a physical limit on the quantity of a good that can be imported into a country in a given period of time.

Question 9

define subsidy

Answer 9

Payments by the government to domestic suppliers that reduce their costs and thus make domestic output cheaper than imported goods and services.

Question 10

define tariff

Answer 10

A tax on the value of imported products – can be specific or ad valorem.

Question 11

define infant industry

Answer 11

New / fledgling industry that may require government protection from overseas competition (for instance through the setting of import tariffs) in
order to develop.

Question 12

state reasons why there are restrictions on free trade

Answer 12

1) national security
2) public safety
30 tax revenue from tariff (aid development)
4) protect domestic industries - susnet industry (just let it happen, stop long it out) and infant industry (eos, short term protectionism)
5) retaliation
6) prevent dumping (but hard to prove dumping so trade talks are better)
7) protect jobs due to unfair labour cost abroad in asia (vietnam, china)
8) correct imbalances in the BOP (CAD) (but retaliation)

Question 13

national security

Answer 13

• during a war, countries are wary of accepting imported as it could be a risk to national security
• national security was trump administrations cited reason for tariffs on aluminium and steel even from allies like canada eu
• US avoids chinese tech as then chinese might weaken us defence. Huawei suggest they dont work with chinese gov but us still don’t trust

Question 14

public safety

Answer 14

• some goods and services pose danger to public health
• uk heavily restricts firearms
• japenese seafood heavily banned by countries after fukushima 2011

Question 15

tax revenue

Answer 15

• developing countries gather lots of tax revenue from tariffs unlike developed countries
• administrating tariffs is much easier than that of other taxes esp bc most industry in poorer countries is agricultural

Question 16

protect domestic industries

Answer 16

• infant indsutry argument: when a developing country first enter industries the products are low quality and outcompeted. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher
• but domestic firms become inefficient and prices rise but south korea created world leading shipbuilding cars and electronic firms
• some countries have less srict rules on labour and environmental control and raw materials reducing their cost so they have an unfair competitive advantage

Question 17

retaliation

Answer 17

• retliation measures put in place bc..
  1) punish other country
  2) convince the other country to remove trade restrictions
  3) serve as a warning to other countries
• us targeted steel and aluminium imports from eu so eu retaliated by targetting $3.3bn of american porducts like 25% duties on harley davidson mc, bourbon whiskey, eyc

Question 18

dumping

Answer 18

• foreign firms might do this to drive out domestic comp or bc they have excess capacity and no buyer
• anti dumping argument: if a country suspects dumping from trade partner, they can impose tariffs or quotas to limit this
• diffcult to detect dumping
• china placed tariffs on stainless stell tubes from eu and japan to prevent dumpin
• initially domestic consumers benefit from cheaper foreign goods but when domestic firms driven out with this form of predatory pricing, foreign firm becomes monopoly chaging very high prices

Question 19

what are trade tariff disadvantages

Answer 19

• market distortions: increased price, decreased choice, less consumer surplus - not allocatively efficient
• production efficiencies; deadweight loss of world efficiency
• retaliation; starts trade wars as it affects their current account balance/ Retaliation hurts consumers and creates further inefficiencies
• eval: effects depend on size of tariff, elasticity of supply and demand of good which has the tariff (inelastic s and d means tariff is minimal)

Question 20

How does import tariff affect:
overall economic welfare, rate of CPI, short term rate of econ growth

Answer 20

• reduction (net loss of econ welfare) , higher (tariffs cause cost push inflation) , higher (more domestic output)