4.1.6 - restrictions on free trade

Question 1

What are some reasons for protectionism/restrictions on free trade?

Answer 1

-protection of infant industries/sunset industries
-protection of domestic employment
-retain self-sufficiency
-correct imbalances on the current account of the BOP
-retaliation against restrictions imposed by another country
-prevent dumping
-reduce unfair competition from countries with cheap labour and poor labour/environment laws
-protection of strategic industries such as defence and energy

Question 2

What is the infant/sunset industries argument for protectionism and an example of this?

Answer 2

Infant industries may face higher costs than foreign firms, making it difficult for them to compete on price. It also takes time for workers to establish efficient practices.
eg. South Korea and Taiwan used protectionist policies in the 20th century to nurture automotive and electronics industries

Question 3

How does protectionism protect domestic employment and give an example of this?

Answer 3

If more FOPs are imported, domestic producers lose money ad jobs are lost. Protecting from foreign trade means jobs and incomes are preserved within domestic firms. However, customers may lose out on choice or have to pay higher prices for g/s.
eg. in 2018, US put tariffs on steel and aluminium imports to protect American jobs in these industries.

Question 4

How does protectionism help to retain self sufficiency?

Answer 4

reduces reliance on imports, so that consumers are self-sufficient and consume more domestic goods and services.

Question 5

How does protectionism correct imbalances on the current account of the BOP and give an example of this?

Answer 5

Restricts imports to reduce trade deficit, improving the BOP position
eg. Argentina used import restrictions to manage recurring balance o payments position

Question 6

Why is retaliation a reason for protectionism and give an example of this?

Answer 6

An economy may use protectionism on a country that use protectionism against them, in retaliation.
eg. China and US trade war

Question 7

How is protectionism used to prevent dumping and give an example of this?

Answer 7

Dumping is the sale of goods below their cost of production. This may be to achieve long-term domination/monopoly.
eg. in 2021, EU imposed anti-dumping duties on Chinese aluminium extrusions to protect European producers from undercutting

Question 8

Why is protectionism used to reduce unfair competition and give an example?

Answer 8

High labour cost countries are unable to compete against countries with cheap labour, there is pressure to raise trade barriers. Cheap labour is a source of comparative advantage. Different rules apply for producers in different countries - Colombia’s minimum wage is just $1.61 an hour

Question 9

Why is protectionism used to protect strategic industries such as defence and give an example?

Answer 9

Ensures that a country isn’t dependent on foreign suppliers during times of conflict or tension.
eg. US restrictions on Chinese tech firms, Huawei are motivated by national security concerns aiming to protect data and infrastructure

Question 10

What is a tariff?

Answer 10

A tariff is a tax on imported goods, also known as an import duty/customs duty. They raise prices to restrict foreign imports into the economy.

Question 11

What is shown in a tariff diagram?

Answer 11

World supply shifts left (up) to world supply + tariff, leading to a contraction in qd and qs of imports. Domestic consumer surplus is reduced and domestic producer surplus is increased. Government earns tax revenue from tariffs, a deadweight welfare loss occurs.

Question 12

What is a quota?

Answer 12

A physical limit on the quantity of imports, creating a shortage. The price to domestic consumers is likely to rise and domestic output increases.

Question 13

What is a subsidy?

Answer 13

Subsidies to domestic producers are grants to firms that reduce the cost of production, lowering prices and making g/s more competitive internationally. These incur a cost to the public finances. Price of imports doesn’t change and no government tax revenue is collected.

Question 14

What are non-tariff barriers?

Answer 14

Non tariff barriers are protectionist measures which may include: product specifications, health and safety regulations, environmental regulations, labelling of products, bureaucracy. They are designed to increase costs and deter foreign companies from attempting to export goods to the country.

Question 15

What is the impact of protectionism on consumers?

Answer 15

Positive = creation of jobs, increased incomes and higher consumption levels due to higher purchasing power.
Negative = reduced domestic consumer surplus leads to a fall in purchasing power, reduced consumption and utility.

Question 16

What is the impact of protectionism on firms?

Answer 16

Positive = increased domestic producer surplus, larger profit margins for firms
Negative = increased cost of production as they can no longer import cheap FOPs.

Question 17

What is the impact of protectionism on governments?

Answer 17

Positive = could help to reduce trade deficit due to reduced incentives to import, increased economic growth.
Negative = risk of inflation due to tariffs leads to a rise in the GPL of goods and service.

Question 18

What is the impact of protectionism on living standards?

Answer 18

Positive = benefits national defence as firms are incentivised to keep manufacturing operations in the domestic economy, leads to better quality public services, etc.
Negative = domestic g/s more expensive, reducing purchasing power leading to a fall in utility and decreased living standards.

Question 19

What is the impact of protectionism on equality?

Answer 19

Positive = protection of domestic jobs reduces income inequalities.
Negative = tariffs have lowered incomes for domestic consumers eg. in America - 4% for poorest households and 2% for wealthiest, widening the income inequality.