4.4 Trade Policies And Negotiations Flashcards
What is protectionism
It is the act of guarding a country’s industries from foreign competition.
This is done in the form of tariffs, quotas, regulations or embargoes
What is a tariff and its impact
A tariff is a tax on imports to a country
The quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases
Show the diagram for protectionism imposing a tariff
Explain this diagram
Originally the quantity of imports is 0 Q1 domestic and 0 Q2 total
After tariff, imports 0 Q3 is domestic and 0 Q4 is total
Purple shows revenue gained for the government
Blue shoes deadweight loss of welfare
What is a quota
This limits the quantity of a foreign produced good that is sold on the domestic market. Sets a physical limit on a specific good imported in a set amount of time
What is meant by export subsidies
Form of government intervention to encourage goods to be exported rather than sold on the domestic market
What is meant by embargoes
This is the complete ban on trade with a particular country
What is meant by a free trade area
This is where countries agree to trade goods with other members without protectionist barriers
For example NAFTA
What is a customs union
There are established common trade policies with the rest of the world such as a common external tariff (CET)
For example the EU
What is a monetary union
Members share the same currency
More economically integrated that a customs union and free trade area
For example the Eurozone
What is an economic union
This is made up of a common market with a customs union. Members have common freedom of movement of goods, services, capital and labour
For example the EU
What are some consequences of economics integration
Trade creation and trade diversion
Reduced transaction costs
Economies of scale
Enhanced competition
Migration
What are the benefits of protectionism
Trade deficit could be reduced as less imports
New industries can be protected helping develop them
Correct market failure protecting society from demerit goods
Improve current account deficit
Protect domestic jobs
What are costs of protectionism
Could distort the market and lead to a loss of allocative efficiency
Loss of consumer welfare and consumers face higher prices and less variety
Extra cost on exporters which could lower output
Regressive tariff damage low incomes more
Risk retaliation from other countries
Could lead to government failure
Benefits of free trade
Countries can exploit comparative advantage increasing output using fewer resources
Increase economic efficiency lowering costs of production and increasing output
More exports could lead to higher economic growth
Specialisation means countries can benefit from economies of scale
