LS3 - Restrictions on free trade (Part 1) Flashcards
1
Q
Free trade
A
International trade without restrictions such as tariffs
2
Q
Protectionist
A
Policy of restricting imports through trade restrictions
3
Q
Are countries free trade or protectionist?
A
- no country that is purely free trade/protectionist - use a mixture of both
- developed more free trade
- developing more protectionist
Exceptions e.g. US protectionist under trump
4
Q
Reasons why countries use trade restrictions
A
- national security
- public safety
- tax revenue
- protect domestic industries
- retaliation
- prevent dumping
5
Q
National security
A
- country may decide to prevent goods and services from entering the country if it believes there is a risk to national security.
- This could be during a war or to protect a countries security interests in peacetime.
- Trade protection based on national security has risen to prominence in recent years due to the election of Donald Trump as US president.
- Chinese technology companies have also been targeted by Trump - US is concerned about their potential to weaken US defence capabilities and leave the US more vulnerable to attacks from China.
- To reduce this threat, the US is putting pressure on US firms and allies not to use Chinese technology in critical infrastructure projects and other areas. Firms such as Huawei claim they do not represent a threat because they do not work with the Chinese government
6
Q
Public safety
A
- Some goods and services pose a danger to public health - A country may decide to ban or restrict products as a result.
E.g. imported firearms are heavily restricted in the UK because firearms usage is restricted to the state. - Food can sometimes be a source of concern e.g. after the Fukushima nuclear disaster in 2011 several countries imposed bans on Japanese seafood.
- Imports of UK beef was banned by the European Union in 1996 due to an epidemic of Mad Cow Disease.
7
Q
Tax revenue
A
- For developed countries, tariffs are nowadays only a small source of tax revenue.
- Most tax revenue in these countries is raised from taxes on income, profit, and sales. Developing countries, however, raise far less from these sources.
- This makes tariffs an important source of tax revenue in poorer countries.
- Administrating tariffs is far easier than other taxes such as income taxes.
- This is especially the case in developing countries because they tend to be agricultural and have large informal sectors. Reducing tariffs in developing countries can therefore have a big impact on government revenues.
8
Q
Product infant industries
A
- The infant industry argument holds that such industries need protection from competition in their formative stages. Therefore, protecting these industries during development is justifiable for proponents of the infant industry argument.
- A tariff makes imports more expensive. Products made by domestic firms become more attractive as a result: there is less competition for these firms. Trade restrictions can therefore act in the interests of domestic firms.
- Downsides of tariffs include higher prices for consumers and reductions in efficiency due to the restriction of competition. For these reasons trade restrictions are generally seen as negative in developed economies.
- However, trade restrictions can be used to support economic development.
E.g. South Korea managed to create world leading firms in shipbuilding, cars, and electronics. - The infant industry argument is an economic rationale for trade protectionism. When a developing country first decides to enter an industry e.g. textiles or vehicles the quality of its goods will be low.
- Foreign imports would likely be able to outcompete domestic goods on quality and price. The nation would thereby struggle to industrialise and improve living standards. There is therefore a case to be made for supporting domestic industries through subsidies, tariffs, and technological acquirement.
- However, this is a difficult strategy to pull off. Many countries have failed due to corruption and a lack of ‘export discipline’.
9
Q
Infant industry
A
- an industry new to a country, but already established in other countries e.g. a country developing a solar panel industry in 2019
10
Q
Retaliation
A
- A country may decide to use protectionist measures on another country’s goods and services. This would cause the country harm as its products would become less competitive, possibility to the extent that sales collapse. This can potentially serve three purposes:
1) To punish the other country.
2) To convince the other country to remove trade restrictions
3) To serve as a warning to other countries.
President Trump has used protectionist measures against several countries. The EU and China have both used retaliatory measures in response.
11
Q
Preventing dumping
A
- Dumping occurs when an exporter sells below production costs. One reason a firm may do this is excess capacity or a failure to find a buyer. To sell this stock firms resort to selling below production costs.
- Another reason is that foreign firms may aim to drive out domestic competition.
- By selling at artificially low prices, foreign firms hope to put domestic firms out of business.
- Once the domestic competition has been eliminated foreign firms can dominate the market (and potentially raise prices). This will have negative effects for a country’s economy in terms of employment and GDP.
- Therefore, according to the anti-dumping argument in favour of trade protection, if a country suspects that a trading partner is practising dumping, it should have the right to impose tariffs or quotas in order to limit imports of the dumped good.
- The main problem with this argument is that because of difficulties involved in proving that dumping is being practised, many governments often use it as an excuse to offer protection to their domestic producers when this protection is not necessary or justifiable.
12
Q
Methods of protectionism
A
- tariff
- quota
- subsidies to domestic producers
- embargo
- admin barriers
13
Q
Tariffs
A
- A tariff is a tax on imports or exports - nowadays mostly on imports and on an ad valorem basis.
- Tariffs have been in the news frequently since the EU referendum and the election of Donald Trump.
- In January 2018, the Trump administration put tariffs on washing machines (20%) and solar panels (30% with the trade declining over four years).
- During the Trump presidency a range of products, such as steel and aluminium, have had tariffs placed on them. - China and other countries have retaliated through their own tariffs e.g. Chinese tariffs on US soybeans.
14
Q
Quota
A
- A quota is a limit on the number of imports allowed for a product into a country.
- The rationale for a quota is to protect domestic firms by restricting imports.
- quotas are a simple limit.
- In reality, quotas are often combined with tariffs.
There was a quota element to Trump’s 2018 washing machine tariffs:
The first 1.2 million washing machines faces a 20% tariff.
Every washing machine after the 1.2 millionth one faces a tariff of 50%.
15
Q
Subsidies to domestic producers
A
- There are several reasons why a country may want to provide subsidies to domestic producers.
- One is to encourage firms to grow in size thereby allowing them to compete on a global scale.
- also, they enable producers to lower production costs thus making their products more competitive (both nationally and internationally). Strong exporting firms provide employment, income and tax revenue. These all tend to be viewed as positive by economists (and politicians).
- Hence there is a temptation for politicians to give subsidies to domestic firms. Several countries have used subsidies as part of successful development strategies. For example, in the 19th century, starting out as an aspirational shipping company, Mitsubishi was given vast subsidies which eventually allowed it to compete on an international level.
