4.1.6 restrictions on free trade

Question 1

reasons for restrictions on free trade

Answer 1

• infant industry argument: newly developing ‘infant’ industries need to be able to build up domestic demand to cover sunk costs and increase EoS and then to be able to emerge in the international market
• job protection: high import demand could mean low domestic demand, this means there is less derived demand for domestic workers increasing unemployment
• protection from potential dumping: foreign firms may sell surplus goods at a very low price, harming domestic producers who can’t produce anywhere near that price
• protection from unfair competition: production costs vary internationally due to varying laws, subsidies and/or costs, this means certain countries will be able to produce at lower costs and therefore price lower, this will lead to unfair competition
• 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.

Question 2

tariffs

Answer 2

definition - tax on imports

used to raise import prices and therefore raise domestic demand as price W+T leads to a shortage in quantity demanded which is filled with domestic goods, tax can also generate small amounts of gov revenue

Question 3

quotas

Answer 3

definition - limits placed on the level of imports allowed into the country

by limiting the amount of imports that can come into a country, a shortage is created, this shortage is filled by domestic producers

Question 4

subsidies to domestic producers

Answer 4

definition - payment by gov to domestic producers to help lower costs and increase output

helps to lower costs for suppliers this means they can price lower, this should help increase domestic demand

Question 5

non tariff barriers

Answer 5

embargoes - complete ban on imported goods

import licensing - countries/firms need a license to import

legal and technical standards - goods can’t be sold to a country if they don’t meet these standards

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

red tape - regulations and laws added to increase the level of bureaucracy to make it more complex to import goods

Question 6

impact of protectionist policies on consumers, producers, governments, living standards, equality

Answer 6

consumers
- higher prices
- less choice

producers
- sell more goods at a higher price
- suffer from higher costs if import controls affect their resources needed for production
- foreign producers will lose out

workers
- little difference to employment figures
- can create new jobs in domestic industries

governments
- gain tariff revenue
- can lead to an inefficiency economy which slows growth

living standards
- tariffs result in deadweight loss shown on the diagram
- can lead to retaliation which can start trade wars as seen with China and the USA

equity
- regressive effect on the distribution of income as rising prices affects poorer members of society more than richer members