4.1.6 - Restrictions On Free Trade

Question 1

What Does Free Trade Aim To Do?

Answer 1

Maximise global output based on the principle of comparative advantage.

Question 2

What Is Protectionism?

Answer 2

Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition.

Question 2

What Are The Reasons For Protectionism?
(7 Points)

Answer 2

~ Infant industries.

~ Sunset industries.

~ Strategic industries.

~ Dumping.

~ Employment.

~ Current account deficit.

~ Labour / environmental regulations.

Question 2

One Reason For Protectionism Is Infant Industries, Explain It
(2 Points)

Answer 2

~ To protect new firms that would be unlikely to succeed at start up due to the level of global competition.

~ Once established the support is removed.

Question 2

One Reason For Protectionism Is Sunset Industries, Explain It

Answer 2

These firms are on their way out and the government chooses to support them to help limit the economic damage that would occur if they closed abruptly.

Question 2

One Reason For Protectionism Is Strategic Industries, Explain It
(2 Points)

Answer 2

~ Industries such as energy, defence and agriculture are essential to self-sufficiency and security.

~ Being reliant on other countries for these creates vulnerabilities for a nation.

Question 2

One Reason For Protectionism Is Dumping, Explain It
(2 Points)

Answer 2

~ Occurs when foreign firms sell products at unfairly low prices in foreign markets and usually below their normal cost of production.

~ Is anti-competitive and can harm a countries industries.

Question 2

One Reason For Protectionism Is Employment, Explain It

Answer 2

When firms outsource production to other countries, or certain industries are experiencing structural unemployment, governments will step in to protect jobs.

Question 2

One Reason For Protectionism Is Current Account Deficit, Explain It

Answer 2

When imports are greater than exports the amount of money leaving the country to support foreign firms is
greater than that entering to support domestic firms, protectionism aims to correct this imbalance.

Question 2

One Reason For Protectionism Is Labour / Environmental Regulations, Explain It
(2 Points)

Answer 2

~ Many countries offer cheap labour and low cost production due to poor environmental regulations.

~ Protectionism can help apply pressure to bring about change in these countries.

Question 3

What Are The 4 Types Of Protectionism?

Answer 3

~ Tariffs.

~ Quotas.

~ Subsidies to domestic producers.

~ Non-tariff barriers.

Question 4

What Is A Tariff?
(2 Points)

Answer 4

~ Is a tax on imported good and services.

~ Domestic producers and retailers have to pay the tariff when the goods or service come into the country.

Question 5

How Do Domestic Firms Increase Their Output From Tariffs?
(3 Points)

Answer 5

~ Tariffs raise the cost of production.

~ Firms then often pass on the increased costs to consumers in the form of higher prices.

~ The higher prices allow firms to increase their output.

Question 6

What Are Quotas?
(2 Points)

Answer 6

~ Is a physical limit on imports allowed into the country.

~ This limit is usually set below the free market level of imports.

Question 7

What Does A Quota Do For Domestic Industries?

Answer 7

Forces people to buy domestic goods.

Question 8

What Are Subsidies?

Answer 8

They lower the cost of production for domestic firms.

Question 9

What Do Subsidies Do For Domestic Producers?
(5 Points)

Answer 9

~ Increase output.

~ Lower prices.

~ Lower prices means their goods and services are more competitive internationally.

~ Increases the level of exports.

~ Increased output may result in increased domestic employment.

Question 10

Describe Non-Tariff Barriers
(3 Points)

Answer 10

~ Embargo’s, total ban on exported goods.

~ Import licensing, when firms need a license to import.

~ Use of legal and technical standards, some products cannot be sold in the country.

Question 11

What Are The Impacts Of Protectionist Policies On Consumers?
(4 Points)

Answer 11

~ Higher prices.

~ Reduced variety and choice.

~ Decreased quality and innovation.

~ Potential job losses.

Question 12

What Are The Impacts Of Protectionist Policies On Producers?
(4 Points)

Answer 12

~ Increased market share, due to reduced foreign competition.

~ Higher prices and profits, due to reduced competition.

~ Job protection and creation, due to reduced foreign competition.

~ Support the growth of domestic industries.