International Trade / Protectionism

Question 1

Define protectionism

Answer 1

Approach used by governments to protect domestic producers

Restrict trade - from overseas competition, financial help to exporters

Question 2

Define trade barriers

Answer 2

Measures designed to restrict imports

Question 3

Reasons for protectionism - restrict free trade

Answer 3

• Prevent dumping: where overseas firms sell large quantities of a product below cost in the domestic market - below cost of production excess supply domestic how to compete prices - hard to prove come from subsidies or minimum prices excess supply - proved not strict retaliation trade blocs better?
• Protect employment structural unemployment boost - if already losing out competitive advantage postponing natural shutting down
• Protecting infant industries - new industries yet to establish themselves - related g&s eos to compete Internationally short term protectionism - allow room for inefficiency // protect against unfair low labour costs e.g. ASIA cant competed
• to gain tariff revenue
• preventing the entry of harmful/unwanted goods
• reduce the current deficit
• retaliation

Protect product standards

Question 4

R1 - PREVENTING DUMPING

Answer 4

• government may use trade barriers feels an overseas firm is dumping goods.
• Dumping is where foreign producers/overseas firms sell large quantities of goods below cost in a domestic market.
• They may do this to deliberately destroy overseas competitors.
• Some cases, businesses that dump products are heavily subsidised by their government.
• Consequently, they have an unfair advantage over foreign rivals and are considered unfair competition for domestic producers.
• If very cheap imports are being sold below cost in a country, domestic producers will find it very difficult to survive in the long term.

Question 5

R2 - PROTECTING EMPLOYMENT

Answer 5

• Trade barriers may be used if domestic industries need protection from overseas competitors to save jobs.
• Unemployment is always a negative and a government may be criticised if jobs are being lost because of cheap imports/cheaper competition

Question 6

R3 - PROTECTING INFANT INDUSTRIES

Answer 6

• Infant industries are new industries that are yet to become established may need protection.
• Argued that infant industries should be protected from strong overseas rivals until they can grow,
  become established and exploit economies of scale.
• However, this approach may not be successful because governments have a poor record of successfully identifying infant industries with potential.

Question 7

R4 - TO GAIN TARIFF REVENUE

Answer 7

• A government can raise revenue if it imposes tariffs on imports.
• This money can be spent on government services to improve living standards, invest/develop public services e.g. education/healthcare

Question 8

R5 - PREVENTING THE ENTRY OF HARMFUL OR UNWANTED GOODS

Answer 8

• A government might be justified in using protectionism if it feels that overseas producers are trying to sell goods that are harmful or unwanted.

Question 9

R6 - REDUCE CURRENT DEFICITS

Answer 9

• A country might need to use trade barriers because it has a very large current account deficit.
• A country has to pay its way in the world and if a current account deficit gets out of control, action may be needed.
• A government might try to reduce imports and increase exports at the same time to reduce
  the deficit.

Question 10

R7 - RETALIATION

Answer 10

• One motive for imposing trade barriers is to retaliate against dumping.
• If a foreign business dumps large quantities of goods below cost, a government may feel obliged to retaliate by imposing heavy taxes on those goods when
  they come into the country.
• Retaliation may also occur if a country imposes
  trade barriers on exporters. That country may retaliate by imposing trade barriers on that nation’s imports.
• This can result in a trade war that will tend to reduce trade between two nations and have a negative impact on both nations

Question 11

TARIFFS - use diagram price against quantity

Answer 11

• Tariffs/custom duties are taxes placed on imports
• restrict trade by making imports more expensive/increasing price

+ advantage = reduces import, reduces cheaper competition, improves current account - raises government revenue
- however too high, imports cease/retalitaion, gov rev = 0 / consumers do not benefit in the short term as prices are higher - tariffs are regressive hurts those on low incomes

A04 - size of tariff impact on market and depends on elasticity of goods demand/supply

Question 12

QUOTAS - use diagram

Answer 12

• Quota reducing imports is to place a physical limit on the quantity of imports allowed into the country.
• restricting quantity of imports, domestic producers face less threat - have more of the market for themselves.
• However, quotas will raise prices because fewer of the cheaper imports are available.
• Placing physical limits on the flow of imports means that domestic producers will meet some demand for those goods.
• This will help to protect employment.

+ One of the main advantages of quotas is that they physically limit the supply of imports. Foreign companies cannot easily get around quotas by adjusting
prices.
+ Also, in the short term, the impact on prices might be limited. It may take a while for shortages to force the price up. In the meantime, domestic producers might be able to increase supply to ‘plug the gap’ in the market.
- One disadvantage is that consumer choice is likely to be restricted and domestic producers might be overprotected and fail to improve efficiency.

Question 13

SUBSIDIES

Answer 13

• Subsidies include giving financial support, such as grants or tax breaks, to exporters or domestic producers that face fierce competition from imports.
• If subsidies are given to domestic producers, this will lower prices for consumers because subsidies reduce
  production costs and increase supply. This forces equilibrium prices down. (DIAGRAM)
• If subsidies are given to exporters, it makes it easier for domestic businesses to break into foreign markets.

+ more domestic firms encouraged to enter the market, helps to boost exports, employment and improve the current account

• costly to government incurs high opportunity cost (export subsidies)
• more effectively spent on government projects building new schools and hospitals
• domestic businesses may be inefficient

Question 14

General negatives to protectionism

Answer 14

• if governments restrict trade consumers end up paying higher prices …unless subsidy, choice will be limited
• if domestic producers are not exposed to competition quality of goods may be inferior and they have less incentive to innovate
• global growth slows production inefficiency and living standards suffer and fewer jobs are created

Question 15

chirred

define embargo

Answer 15

official order to stop trade with another country

Question 16

define free trade

Answer 16

where goods coming into and out the country are not controlled or taxed - at the same time encourages firms to sell goods and services abroad.

Question 17

Advantages of free trade

Answer 17

• consumers get more choice
• consumers often buy goods cheaper which improves their standard of living as they have greater spending/purchasing power
• when domestic producers face competition from those abroad there is pressure to keep costs/prices down and produce high-quality goods - more innovative and efficient
• lower input prices = obtain essential inputs/raw materials for industries at much lower costs
• when countries specialise in production of goods they are more efficient g&s produced where costs will be minimised resulting in the global economy benefitting and consumers all over the world buying goods for the lowest prices
• wider market for businesses: countries are free to specialise and trade firms will be selling to larger markets - sell their g&s to a wide range of countries which helps to reduce the risk of enterprise -> firms can sell larger quantities in a wider range of markets exploit risk bearing economies of scale as output higher than just in domestic market - expands lower costs and improve efficiency

Question 18

Disadvantages of free trade

Answer 18

• competition for domestic producers: imports from anywhere can flow into the economy if high quality and competitive prices domestic producers may struggle to compete
• unemployment: threat to employment levels when domestic industries are threatened by cheap imports
• increase development gap where rich nations grow more prosperous & much faster than developing countries // loss culture // countries lose sovereignty do not have complete control over matters that affect them
• developing nation rely too much on primary goods, if demand/prices fall nations suffer a loss of trade and income low income elasticity demand doesnt grow when global economy does
• countries avoid overspecialisation and try to diversify