LS3 - Restrictions on Trade

Question 1

Protectionism

Answer 1

Restricting free trade through trade barriers

Question 2

Free trade

Answer 2

International trade without restrictions or barriers

Question 3

Why use trade restrictions?

Answer 3

1. National Security - country might prevent goods entering if it could pose a risk to national sec - might be during a war, or protect country’s security interests
2. Public Safety - some goods might pose a danger to public health, resulting in ban or restricting a good
3. Tax revenue - tariffs can be a important source of tax income to a country; adminstering tariffs is easier than other taxes; more useful for developing countries
4. Protect domestic industries - domestic firms can face more comp from foreign countries, as thye tend to be lower priced, so domestic firms go out of business/struggle - by using protectionism, such as tariffs, domestic firms can compete, protecting jobs
5. Retaliation - responding to country B’s trade barriers on country A, by imposing restrictions on country B - punish country B, convince it to remove its restrictions, serve as a warning to other countries
6. Preventing dumping

Question 4

Methods of protectionism

Answer 4

• Tariff - tax on imports or exports (mostly imports)
• Quota - limit on the num of imports entering a country
• Subsidies for domestic producers - helps domestic firms compete by boosting growth
• Embargo - ban on trade or other commercial activity with a particular country
• Administrative barriers - country A might increase red tape and procedures involved in exporting good B to country A, so imports in country A are redcued

Question 5

Impact of Protectionism

Answer 5

• Impact on producers - by receving govt support, domestic firms can become more competitive against foreign comp; but if support is given unconditionally, firms can become inefficient and fail to progress
• Impact on consumers - trade barriers limit choice for consumers, make imports more expensive
• Impact on workers - receive protection on jobs and wages; but if some industries use a lot of imported goods in their business, their costs will rise, profits will be harmed, firm may go out of business, loss of jobs
• Impact on govts - for developing countries, tariffs can be a good source of tax income; for more developed countries, trade barriers can be used to win political support and protect industries deemed important; govts faced with opp costs in terms of protectionist measures