Restrictions on Free Trade Flashcards
Define Free Trade
International trade without restrictions such as tariffs
Define Protectionism
A policy which restricts imports through trade restrictions
Reasons why countries use trade restrictions
National Security
Public Safety
Tax Revenue
Protect Domestic Industries
Retaliation
Prevent Dumping
Why may national security be a reason for trade restrictions
Prevent goods and services entering a country which a country believes is a risk to national security
Could be during a war or to protect a countries security interests in peacetime
Why may public safety be a reason for trade restrictions
Some goods and services pose a danger to public health
Why may tax revenue be a reason for trade restrictions
For developed countries - tariffs are only a small source of tax revenue
For developing countries - tariffs are an important source of tax revenue
Why may protect domestic industries be a reason for trade restrictions
Rise in price on a good on which a tariff is placed makes products made by domestic firms more attractive
What is an infant industry
An industry new to a country, but already established in other countries
What is the infant industry argument
An economic rationale
When a developing country first decides to enter an industry - the quality of its goods will be low
Foreign imports would likely be able to outcompete domestic goods on quality and price
Nation would then struggle to industrialise and improve living standards
Downsides of tariffs
Higher prices for consumers and a reduction in efficiency due to restriction of competition
This is why trade restriction is seen as negative in developed economies
Why may retaliation be a reason for trade restrictions
To punish the other country, to convince the other country to remove trade restrictions, to serve as a warning to other countries
Why may preventing dumping be a reason for trade restrictions
Dumping may affect a country’s economy in terms of employment and GDP
What is Dumping
Occurs when an exporter sells below production costs - firm may do this due to excess capacity or a failure to find a buyer
Foreign firms may aim to drive out domestic competition
What is a tariff
Tax on imports or exports
What is a quota
Limit on the number of imports allowed for a product into a country
Why may countries want to provide subsidies for domestic producers
Encourage firms to grow in size - allowing them to compete on a global scale
Lowering production costs - products can be more competitive - firms become bigger and provide employment, income and tax revenue
What is an embargo
An official ban on trade or other commercial activity with a particular country
Effect of administrative barriers
Customs impose obstacles to imports and reduce their quantity
Technical standards must be met
Define Detractor
A person who disparages someone or something
Define Disparage
Regard or represent as being of little worth
Define Evangelist
An enthusiastic advocate
Define Panacea
A solution or remedy for all difficulties or diseases
Why do developed countries use protectionist policies
To industrialise
When is protectionism vital
At early stages of development to support infant industries
How can protectionism be harmful
When there isn’t an effective development strategy
What must occur for protectionism to be effective
Firms must be required to earn the support they receive - given unconditional support means firms become less innovative and productive and make less profit as a result
What is the Impact on Producers due to Protectionism
Gain an advantage over foreign competitors - state support
State support is dangerous as firms can become inefficient
How can an economy gauge the development and quantity of their domestic goods
By comparing it to foreign goods and exporting
What is the Impact on Consumers due to Protectionism
They suffer - embargoes and quotas limit choice
Tariffs make goods more expensive
What is the Impact on Workers due to Protectionism
Workers working in protectionist industries gain job security and higher prices if protectionism is effective
Firms may lose out in other industries as production costs rise and may be laid off to by firms in order to retain profits
What is the Impact on Governments due to Protectionism
Tariffs provide large amounts of revenue for developing countries
Can win political support and protect industries in developed economies
High operating costs
