4.1.6 Restrictions on Free Trade

Question 1

Free trade definition?

Answer 1

• International trade without restrictions such as tariffs

Question 2

Protectionism definition?

Answer 2

• Policy of restricting imports through trade restrictions

Question 3

Why do countries use trade restrictions?

6 reasons

Answer 3

• National security
• Public safety
• Tax revenue
• Protect domestic industries
• Retaliation
• Prevent dumping

Question 4

Why would a country use trade protectionism for national security?

Answer 4

• May decide to prevent goods and services from entering a country if it believes there is a risk to national security

e.g. US putting pressure on firms to not use Chinese technology in critical infrastructure projects

Question 5

Why would a country use trade protectionism for public safety?

Answer 5

• Country may ban or restrict goods and services that pose a danger to public health

e.g. imports of UK beef banned by EU due to Mad Cow Disease

Question 6

Why would a country use trade protectionism for tax revenue?

Answer 6

• For developing countries, tariffs are an important source of tax revenue
• Adminstrating tariffs is easier than other taxes e.g. income taxes

Question 7

Why would a country use trade protectionism to protect domestic industries?

Answer 7

• Infant industry argument: they need protection from competition in their formative stages as quality of goods will intially be low and outcompeted by foreign imports

Question 8

Infant industry definition?

Answer 8

• An industry new to the country but already established in other countries

Question 9

Why would a country use trade protectionism for retaliation?

Answer 9

• Country may decide to use protectionist measures on another country’s goods and services and so that country may retaliate to:
• Punish other country
• Convince other country to remove trade restrictions
• Serve as a warning to other countries

Question 10

Why would a country use trade protectionism to prevent dumping?

Answer 10

• Dumping drives domestic competition out

Question 11

Dumping definition?

Answer 11

• Occurs when an exporter sells below production costs because:
• Excess capacity
• Failure to find a buyer
• To drive domestic competition out

Question 12

What are the methods of protectionism?

(5)

Answer 12

• Tariffs
• Quotas
• Subsidies to domestic producers
• Embargo
• Adminstrative barriers

Question 13

Tariffs?

Answer 13

• A tax on imports or exports

e.g. Trump’s tariffs on steel and aluminum

Question 14

Quotas?

Answer 14

• A limit on the number of imports allowed for a product into a country

Often combined with tariffs irl, so first 1.2M washing machines face a 20% tariff then each one after faces 50%

Question 15

How do subsidies protect domestic industries?

Answer 15

• Encourages firms to grow in size, allowing them to compete globally
• Lowers production costs = more competitive
• Strong exporting firms = employment, income + tax revenue

Question 16

Embargo?

Answer 16

• Official ban on imports or exports

e.g. firearms in most countries

Question 17

Adminstrative barriers?

Answer 17

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

e.g. excessive paperwork

Question 18

What is export discipline?

Answer 18

• Selling within protected home market doesnt reveal quality of goods produced
• So, firms required to sell in international markets to gauge quality of products and track technological developments
• States can determine which firms are using state protection to develop and innovate and can reward the successful firms and punish the failing firms

“Concentrates on the sale of products created in the domestic market to overseas markets”

Question 19

How do protectionist measures impact producers?

Answer 19

• Producers gain an advantage over foreign competitors through state support
• State support shouldnt be given unconditionally to prevent lack of export discipline

Question 20

How do protectionist measures impact consumers?

Answer 20

• Embargoes and quotas limit choice for consumers
• Tariffs make goods more expensive

Question 21

How do protectionist measures impact workers?

Answer 21

• Increased job security and potentially higher wages (if prices rise due to lack of competition)
• BUT some workers work in industries that rely on imports in production process so protectionism = raw materials and components more expensive = final good more expensive = reduced output = reduced need for labour

Question 22

How do protectionist measures impact governments?

Answer 22

• For developing countries, tariffs = large source of gov. revenue
• For developed countries, protectionist measures can = political support and protect industries strategically important

e.g. Trump protected steel and aluminum industries to gain votes in the states that produced this

Question 23

Welfare effect of tariffs =

Answer 23

Gain in PS + gain in tariff revenue - loss in CS

Question 24

DWL?

Deadweight loss

Answer 24

• A loss of economic welfare that can occur when the free market equilibrium for a good or service is not achieved

Question 25

How do tariffs affect DWL?

Answer 25

• Tariffs encourage deflection of trade to inefficient producers and smuggling to evade tariffs = reduced welfare
• Tariffs => consumer loss > producer loss = DWL