4.1.6 Restrictions On Free Trade Flashcards
Reason for restrictions on free trade
- Infant industry argument
- Job protection
- Protection from potential dumping
- Protection from unfair competition
- Terms of trade
- Danger of over-specialisation
Infant industry argument
An infant industry is one that is 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 sunk costs, meaning their AC will be higher.
- Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level.
- e.g. worked well in Japan
- Eval: generally tends to be ineffective as firms grow to be inefficient and the government tend to have a poor record of ‘picking winners’. There may be other more effective methods, such as subsidies.
Job protection
Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country.
- Not only would this have negative economic consequences, it would be politically unpopular.
Terms of trade
If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports.
Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improve the terms of trade.
Types of restrictions on trade
- Tariffs
- Quotas
- Subsidies to domestic products
- Non-tariff barriers
Tariffs
Tariffs are taxes placed on imported goods which make them more expensive to buy, making people more likely to buy domestic goods.
Quotas
Quotas are limits placed on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that good and the quota is already used up.
- leads to welfare loss like tariffs
Subsidies to domestic products
These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices.
- Sometimes subsidies are purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports.
- Subsidies can also be given to domestic firms that compete with imports, usually in the form of indirect subsidies like tax breaks or cheap loans.
- Research and development subsidies will help the firm to be competitive by ensuring they have the most up to date technologies e.g. China, who subsidise their car industry.
Non-tariff barriers
- countries can introduce an embargo (total ban on imported goods)
- countries can introduce import licensing when countries/firms need a license to be able to import ; by reducing the number of licences they give out, the government can restrict the level of imports
- use of legal and technical standards means some products cannot be sold in the country e.g. special specifications can be imposed for goods or intellectual property laws over patents
— on top of this, countries can use voluntary export restraint agreements where they agree to limit the volume of exports to one another over an agreed period of time to allow domestic producers to grow and establish
Impact of protectionist policies on: CONSUMERS
- There are higher prices for consumers as they are unable to buy imports at the cheaper price. It tends to raise the price of domestic producers since goods and services needed for the production of these goods may also suffer from import controls and it limits the competition for domestic producers so they have less incentive to be efficient.
- Moreover, they suffer from less choice (less consumer utility)
Impact of protectionist policies on: PRODUCERS
- Domestic producers tend to benefit from import controls since they have less competition so can sell more goods at a higher price than otherwise and they will benefit from measures to increased exports.
Eval: However, they may suffer from higher costs if there are controls on the imports they need for production. - Foreign producers will lose out as they are limited in where they can sell their goods. Inefficient, domestic producers are kept in production, whilst efficient, foreign ones lose out.
Impact of protectionist policies on: WORKERS*
- Evidence suggests that there is little difference to employment figures.
- It can be argued that allowing inefficient firms to close would be better for workers in the long run. The market would reallocate resources and create new jobs, with greater security
- Following the steel tariffs imposed in America in 2018, it is estimated that 16 jobs will be lost elsewhere for every job gained in the steel industry. (The Economist)
Eval: However, Argentina have been successful at implementing tariffs which protect jobs
Impact of protectionist policies on: GOVERNMENTS
In the short run, governments benefit from protectionist policies as they can gain tariff revenues and they are politically popular.
However, it can lead to an inefficient economy which stifles growth.
Impact of protectionist policies on: LIVING STANDARDS
As the tariff diagram shows, the imposition of import controls results in deadweight welfare loss.
• It also causes trade wars since the introduction of restrictions often leads to retaliation by other countries. A recent example of this is the US-China trade war, where each country continues to impose more tariffs on the other’s goods. This causes a reduction in trade and growth.
Impact of protectionist policies on: EQUALITY/EQUITY
It has a regressive effect on the distribution of income as the rise in price affects the poorer members of society far more than the well off as it is they are no longer able to afford the products.
