4.1.6: Restrictions on Free Trade Flashcards
What are the reasons for restrictions on free trade?
- Infant Industry Agreement
- Job Protection
- Protection from Potential Dumping
- Protection from Unfair Competition
- Terms of Trade
- Danger of over specialisation
What is an infant industry?
- An industry that is just being established within a country.
What is the infant industry arguement?
- To be able to compete in the international market, they will have to build up a reputation and customer base, meaning they wil have to cover a lot of sunk costs.
- As they an infant industry they won’t be able to do this/ they will find it very hard to do it.
- Therefors, the gov protects them until they are able to compete on an equal level.
- This has worked well in Japan, but is mostly ineffective as firms grow to be inefficient.
Why is job protection a reason for restrictions?
- Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, causing job losses in the country.
What is dumping?
- Dumping is when a country or company with surplus goods sells these goods off to other areas of the wporld at very low prices.
Why is protection from potential dumping a reason for restriction on free trade?
- Dumping harms domestic producers.
- The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a loss
- Example, In China, tariffs are placed on stainless steel tubes from the EU and Japan to prevent from dumping.
Why is protection from unfair competition a reason for restrictions on free trade?
- As there are different rules in countries, producers in different countries can produce at different prices.
- Domestic producers may be unable to compete with a firm that has low menu costs eg labour costs, health and safety costs or a firm that is subsidised by the government.
Why are terms of trade a reason for restrictions on free trade?
- if a country’s terms of trade worsen, it may face economic challenges.
- To protect domestic industries and improve trade conditions, countries may impose tariffs or quotas, reducing imports and attempting to maintain a favorable balance.
Why is danger of over specialisation a reason for restriciton on free trade?
- Some believe that no country should become totally reliant on another for important products or materials and so it is important to introduce protectionism on these goods to prevent firms and consumer becoming reliat on them.
What are the types of restrictions on free trade?
- Tariffs
- Quoatas
- Subsidies to domestic products
- Non-tariff barriers
What is a tariff?
- Taxes placed on imported goods
How are tariffs a type of restriction?
- Tariffs make imported goods more expensive to buy, making people liklely to buy domestic goods and making traders more likely to import less.
What are quotas?
- Quotas are limits placed on the level of imports allowed into a country
- The imposition of quotas leads to welfare loss (on a graph)
How are subsidies to domestic producers a type of restriction?
- They lower costs for producers and help them to be more competitve by enabling cheaper prices
- Research and devolpement subsidies will help the firm to be more competitive by ensuring they have up to date technologies.
- Example, China subsidising their car industry.
What are examples of non tariff barrierrs?
- An embargo: a total ban on imported goods
- Import licensing: countries/ firms need a licence to be able to import, so by reducing the number of licences given out, this restricts the level of imports.
What are the impacts of protectionsit policies on consumers?
- Higher prices; unable to buy imports at the cheaper price.
- Less choice, due to less imported goods
What is the impact of protectionsit policies on producers?
- Higher profit; they can sell more goods at a higher price as they have less competiton
- EV: But they may suffer from higher costs if there are controls on the imports they need for production
- Foreign producers make less profit, as they are limited in where they can sell their goods.
What is the impact of protectionist policies on workers?
- More job creation with greater security : Allowing inefficient firms to close would be better for workers in the long run, as the market would reallocate resources
What are the impacts of protectionist policies on governments?
- Political Popularity and Tariff Revenues, in the short run
- EV: They can lead to an inefficeint economy which stifles growth.
How do protectionist policies impact living standards?
- The imposition of import controls result in deadweight welfare loss
- Retaliation from other countries: They can lead to trade wars
- Example: US-China Trade War where each country comtinues to impose more tariffs on the other’s goods, reducing trade and growth.
How do protectinist policies impact equity?
- It has a regressive effect on the distribution of income as the rise in ptice affects the poorer members of society far more than the rish, as they are no longer able to afford the products.
