4.1.6 Restrictions on free trade

Question 1

what are the main reasons for protectionism?

Answer 1

• infant industry argument, protecting emerging industries until they have gained economies of scale
• sunset industry argument, slow the decline of old sectors and limit structural unemployment
• diversify an economy though to be dependent on one product
• raising tax levels, important for countries w low tax base
• improve the trade balance + preserves jobs in key industries
• prevention of unfair trade like dumping
• protect strategic industries eg electricity

Question 2

what’s dumping?

Answer 2

happens when firms sell exports at below costs or below normal prices in the home market
- predatory pricing is illegal

Question 3

what are import tariffs?

Answer 3

tax on imports that may be ad valorem (%) or a specific tax

Question 4

what are import quotas?

Answer 4

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

Question 5

what are subsidies?

Answer 5

money from the government to suppliers that reduce their costs
➡️ increase supply and therefore reduce the market equilibrium price

Question 6

what are non-tariff barriers?

Answer 6

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

Question 7

impact of protectionism on domestic producer?

Answer 7

• benefit from restrictions as increases the market price and makes it more profitable for them to stay in /
  enter the market
• but might encourage
  domestic firms to become less productively efficient

Question 8

impact of protectionism on consumers?

Answer 8

• higher price in the market because of limit on import products, less competition in the market might also
  affect the quality of products
  ➡️ Consumers who work for domestic firms may benefit from higher employment and wages

Question 9

impact of protectionism on government?

Answer 9

✅
- improve/promote domestic markets
❌
- higher prices from imported goods

Question 10

main arguments against protectionism?

Answer 10

• resource misallocation
• dangers of trade wars
• potential for more corruption
• higher prices for domestic consumers
• increased input costs for home producers
• barriers to entry (increased monopolies)