Free Trade and Protectionism Flashcards
Define ‘free trade’.
International trade that is conducted without any restrictions
What are the 5 advantages of free trade?
Lower prices Increased choice for consumers Wider markets for businesses Provides new job opportunities Cultural tolerance
What are the 5 disadvantages of free trade?
Competition for domestic businesses - can’t compete with MNCs, shut down
Overspecialisation
Wastage of resources
Overreliance on imports - current account deficit
What are the 2 features of developing countries’ trade?
Focus on primary products
Dependent on market prices set by global demand and supply - can be volatile
What are the 2 features of developed countries’ trade?
Focus on exporting manufactured goods and services
More ability to set prices - export revenue tends to be more stable
Define ‘protectionism’.
The restriction of free trade/protection against imports
What 6 reasons do countries use protectionism for?
Preventing a current account deficit (X < M)
Helping infant industries grow
Protecting jobs and small businesses
Preventing ‘dumping’ of foreign goods
Generating government revenue
Offsetting low wage competitions from LDCs
Define ‘infant industries’.
New industries yet to establish themselves
Define ‘dumping’.
When an overseas firm sells large quantities of a product below cost in the domestic market
What are the 7 disadvantages of protectionism?
Retaliation - can lead to trade wars
Unemployment if exports fall - labour is derived demand
May harm LDCs - stops access to rich markets
Loss of choice
Higher prices
Increased cost of production for firms importing raw materials
Cost-push inflation
What are the 4 types of protectionism?
Tariffs
Quotas
Subsidies
Administrative barriers
Define ‘tariff’.
A tax on imports
How do tariffs reduce the level of imports?
Increases the price of imports, incentivising consumers to buy domestically
What are the 2 advantages of tariffs?
Generates government revenue
Improves current account (X > M)
What are the 2 disadvantages of tariffs?
Higher prices for consumers
Cost-push inflation
What 3 factors does the effectiveness of tariffs depend on?
The product taxed
How long it is kept
Size of tariff
Define ‘quota’.
A physical restriction on how many goods can be imported
How do quotas reduce the level of imports?
Limits the number of goods imported to a country
What are the 2 advantages of quotas?
More demand for domestic goods
Economic growth and employment (M↓, AD↑)
What are the 2 disadvantages of quotas?
Expensive and difficult to monitor
Higher prices and less choice for consumers
What 2 factors does the effectiveness of quotas depend on?
Size of quota
Type of good it is placed on
How do domestic subsidies reduce the level of imports?
Reduces the price of domestic goods and makes them more attractive
What are the 4 advantages of domestic subsidies?
Less likely to lead to retaliation
Improved quality of domestic goods - export-led growth
Increased employment
Improvement of current account
What are the 4 disadvantages of domestic subsidies?
Costs government money - potential impacts on inflation
Opportunity cost
Takes time to work/not guaranteed
Inefficiency due to overreliance
What 3 factors does the effectiveness of domestic subsidies depend on?
Size of subsidy
How long it is given for
Which industry receives it
How do administrative barriers reduce the level of imports?
Added cost of compliance adds to foreign firms’ cost of production, reducing supply
What are the 3 advantages of administrative barriers?
Unlikely to lead to retaliation
Easy to implement
Makes goods safer and better
What are the 4 disadvantages of administrative barriers?
Expensive to monitor and enforce
Affects developing countries
Doesn’t generate revenue
Doesn’t restrict imports
What 3 factors does the effectiveness of administrative barriers depend on?
How strict they are
How effectively they are monitored
How costly they are to enforce
