Macro 14 - Restrictions on free trade and trading blocs

Question 1

Define the term free trade

Answer 1

Free trade is international trade without restrictions such as tariffs or quotas

Question 2

What are the reasons for restrictions on free trade?

Answer 2

• To protect infant industries
• To protect older “sunset” industries
• To ensure employment protection
• To prevent dumping
• To correct a balance of payments deficit on the current account
• To restrict imports from countries whose health and safety regulations and environmental regulations are less stringent
• For strategic reasons
• Retaliation against trading partners

Question 3

Define the term dumping

Answer 3

Dumping refers to goods being exported to another country at below the average cost of production. If proved it is illegal under WTO rules

Question 4

What are the different methods of protectionism?

Answer 4

• Tariffs
• Quotas
• Subsidies to domestic producers
• Non-tariff barriers
• Exchange rate manipulation

Question 5

Draw a tariff diagram, label all the different areas on it and explain it

Answer 5

See page 4 in pack 14
See page 203 in the revision guide

Question 6

On a tariff diagram what does the rectangle area in the middle of the diagram represent?

Answer 6

Tax revenue raised by the government

Question 7

On a tariff diagram what does the area of the two triangles either side of the rectangle represent?

Answer 7

The net welfare loss

Question 7

On a tariff diagram what is the supply and demand curve labelled as?

Answer 7

Domestic supply and Domestic demand

Question 8

On a tariff diagram what are the two horizontal lines labelled as?

Answer 8

World supply and world supply plus tariff

Question 9

What are the main evaluation points related to a tariff

Answer 9

• Size of the tariff (draw a diagram to illustrate this)
• The PED of the product being imported
• If tariff revenue is used to support infant industries
• Other methods of protectionism used at the same time
• Retaliation from trading partners
• Other factors changing at the same time

Question 10

Draw a diagram to illustrate the size of a tariff in an evaluation point

Answer 10

See page 6 in pack 14

Question 11

What are the positive and negative impacts of protectionism on producers in the country that imposed the tariff?

Answer 11

Positive:
- Higher revenue, producer surplus and profits as domestic demand for their products increase
Negative:
-Cost of component parts may also rise increasing costs of production
- Possible increase in inefficiency due to less effective competition

Question 12

What are the positive and negative impacts of protectionism on producers in the country which the tariff has been imposed on?

Answer 12

Positive:
- Firms in the country may be forced to become more efficient in order to compete globally
Negative:
- Lower revenue and profit as demand for the exports contracts

Question 13

What are the positive and negative impacts of protectionism on workers in the country that has imposed the tariff?

Answer 13

Positive:
- Employment will increase as domestic demand products rises, hence derived demand for labour also rises
Negative:
- The tariff could cause jobs in other sectors to be lost
- Possible retaliation may mean that exports will fall leading to potential job losses

Question 14

What are the positive and negative impacts of protectionism on consumers in the country that imposed the tariff?

Answer 14

Positive:
- Might face a more stable supply long term
Negative:
- Consumers face higher prices. This may reduce living standards particularly if the tariff is imposed on essentials

Question 15

What are the positive and negative impacts of protectionism on the government in the country that imposed the tariff?

Answer 15

Positive:
- Greater tax revenue from tariff and more revenue from corporation, income and sales taxes if demand for goods increases
Negative:
- If protectionism takes the form of subsidies to domestic firms the budget deficit may worsen
- Retaliation may mean no change in demand for domestic products

Question 16

What is a trading bloc?

Answer 16

Trading blocs are associations between different governments that promote and manage trade

Question 17

What are the four stages of economic integration in order of least restrictions to most?

Answer 17

1- Free trade area
2- Customs union
3- Common market
4- Monetary union

Question 18

What are the features of a free trade area?

Answer 18

A free trade area is an agreement between 2 or more countries to abolish tariffs on trade between themselves whilst they maintain their own restrictions with other countries

Question 19

What are the features of a customs union?

Answer 19

• Free trade area restrictions
• The countries involved establish a common external tariff against non-members

Question 20

What are the features of a common market?

Answer 20

• Customs union restrictions
• The countries agree to the free movement of factors of production
• The countries introduce an agreement on the provision of state aid and public sector procurement policies

Question 21

What are the features of a monetary union?

Answer 21

• Common market restrictions
• Members have the same currency and therefore the same monetary policy

Question 22

What are the benefits of trade agreements?

Answer 22

• The benefits of specialisation
• Trade creation
• Attraction of FDI

Question 23

Define the term Trade creation

Answer 23

Trade creation is where economic integration results in high cost domestic production being replaced by imports from a more efficient source within the economically integrated area

Question 24

What is the main disadvantage of trade agreements?

Answer 24

• Trade diversion
  Trade diversion occurs when economic integration results in trade switching from a low cost supplier outside the economically integrated area to a less efficient source within the area. It distorts comparative advantage

Question 25

What are some evaluation points for trading blocs?

Answer 25

• Type/extent of integration used
• Relative efficiencies of countries inside and outside of the region
• Differences in the opportunity costs of production
• PEDs and PESs of goods and services affected by integration
• How other non-member countries react
• How many goods are included

Question 26

What is the European Monetary Union?

Answer 26

This is the deepest form of economic integration. 19 members have joined the EMU

Question 27

What are the main features of the European Monetary union?

Answer 27

• A single currency is used by all participants, the euro
• There is an independent central bank which regulates and sets the rate of interest and monetary policy of members in the Eurozone
• There is a stability and growth pact that limits the public sector borrowing of member countries to 3% of GDP.

Question 28

What are the benefits to the member countries of the EMU?

Answer 28

• Avoidance of exchange rate fluctuations
• Price transparency
• Lower inflation
• FDI

Question 29

What are the disadvantages to the member countries of the EMU?

Answer 29

• The euro operates on a floating exchange rate so individual countries would have little influence over the changing value of the euro
• Constraints on the use of fiscal policy
• There is lots of structural unemployment in the Eurozone

Question 30

What is the world trade organisation (WTO)?

Answer 30

The world trade organisation (WTO) is an international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers

Question 31

What are the WTO trading principles?

Answer 31

• Most favoured nation
• National treatment

Question 32

What is the WTO trading principle - most favoured nation?

Answer 32

Most favoured nation means treating other people equally. Under WTO agreements, countries cannot normally discriminate between their trading partners. If you grant someone a special favour you have to do the same for all WTO members

Question 33

What is the WTO trading principle - national treatment?

Answer 33

National treatment refers to treating foreigners and locals equally. Imported and locally produced goods and services should be treated equally

Question 34

What are some of the criticisms against the WTO?

Answer 34

• Sometimes the pace of change is slow as all countries have to agree to a decision for it to be passed
• Many disputes between member countries remain unsettled