4.1.6 - Restrictions on free trade Flashcards
What is free trade ?
International trade without restrictions such as tariffs or quotas.
What is the WTO
An international organisation which provides a forum for its member governments to discuss trade agreements and settle disputes, using a set of trade rules.
- The WTO currently has over 150 members, including countries with the biggest economies.
The WTO has many agreements its members must follow, including: - Countries must treat all their trading partners, and foreign and domestic goods, equally.
The WTO wants to encourage competitiveness and discourage trade barriers, such as subsidies.
What is protectionism
Trade protectionism refers to government policies and actions taken to restrict or limit international trade in order to protect domestic industries from foreign competition.
What are all the reasons for restrictions on free trade ?
- to protect infant industries : Industries that are just starting out, particularly in developing countries, struggle to compete with international companies. Governments might choose to impose trade barriers until the companies are big enough to compete. However, there’s a risk that the industry may never become truly competitive, and in the meantime, domestic consumers are stuck with higher prices or lower quality goods.
What are the types of restrictions on free trade ?
- Tariffs
- Quotas
- Subsidies to domestic producers
- Non-tariff barriers
What are tariffs ?
- Tariffs are taxes imposed on imported goods.
- They increase the cost of imported products, making them less competitive compared to domestic alternatives.
E.g import or custom duties
What are quotas ?
- A limit on the quantity of a specific product that can be imported.
- They directly control the volume of imports, often to protect domestic producers.
What are subsidies to domestic producers ?
- Governments provide financial support to domestic industries, reducing production costs.
- Subsidies make domestic goods more competitive in both domestic and international markets.
What is meant by non-tariff barriers when it comes to protectionism
These are various measures other than tariffs that restrict trade.
Examples include licensing requirements, technical standards, and health and safety regulations.
Draw a tariff diagram
Annotate how consumer surplus changes on the diagram
- Always develop the diagram by adding the welfare losses and tax rev.
Annotate how producer surplus changes on the diagram
Evaluation points of a tariff and its effect .
The impact depends upon the magnitude of the tariff imposed (1% or 20%).
As well as the duration of the duration of the tariff.
- Also the elasticity of imports.
Impact of protectionist policies on consumers.
- Tarriffs and quotas would ⬆️price of imports but subsides will ⬇️ price of goods and services.
- Additionally subsides will help to make firms more intentionally competitive, this will increase export revenue, which may lead to increase profits which can be reinvested for further investment as well as offering more choice.
- Decreased imports may lead to decreased standard of living.
- Tariffs are regressive which may lead to worsening inequality.
What are the Impacts of protectionist policies on domestic producers.
- Domestic firms are Protected from having to compete with international firms that have much lower prices.
- Risk of Retaliation – Other countries may impose their own protectionist measures, which could harm domestic industries that rely on exports.
- With less competition, domestic firms may become complacent, leading to inefficiencies or lower incentives for innovation. Which will reduce competitiveness in the long run.
- Higher cost of importing raw materials.
What is the impact of tariffs for foreign producers ?
- Higher priced exports, decrease intentional competitiveness, Deceased demand for their exports, this will decrease export revenues which may affect their profits . Which could affect investment and so long run as.
- ## This will also decrease output so they may experiment higher average cost as well as not being able to access economies of scale (Micro).
What is the impact of protectionist policies for the government ?
- Tariffs : Generate tax revenue through tariffs, this can be reinvested into areas of the economy. Also to subdsies domestic firms so that they can become more competitive and increase their output.
- Subsides : Have a huge opportunity cost and if firms become reliant rather than becoming more innovative or efficient. they might not allocate resources optimally, which could lead to higher costs, lower quality goods, or even less competition in the market. Creating a dead weight welfare loss to society (micro impacts).
- Protectionist policies may strain diplomatic relations and lead to retaliation by trading partners.
Impacts of protectionist policies in standards of living
Tariffs and subsidies - It can protect jobs, so people have a stable income and so they continue to afford basic necessities which helps to maintain a good standard of living.
However, it may reduce consumer choices and increase prices which may reduce standards of living.
Impacts of protectionist policies on equality .
- Tariffs are regressive so will affect lower income house holds much more than higher income household which exacerbate income inequality.
- It may also affect global income distribution by limiting opportunities for developing countries to export.
