Restrictions on Free Trade

Question 1

Define Free Trade

Answer 1

International trade without restrictions such as tariffs

Question 2

Define Protectionism

Answer 2

A policy which restricts imports through trade restrictions

Question 3

Reasons why countries use trade restrictions

Answer 3

National Security

Public Safety

Tax Revenue

Protect Domestic Industries

Retaliation

Prevent Dumping

Question 4

Why may national security be a reason for trade restrictions

Answer 4

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

Question 5

Why may public safety be a reason for trade restrictions

Answer 5

Some goods and services pose a danger to public health

Question 6

Why may tax revenue be a reason for trade restrictions

Answer 6

For developed countries - tariffs are only a small source of tax revenue

For developing countries - tariffs are an important source of tax revenue

Question 7

Why may protect domestic industries be a reason for trade restrictions

Answer 7

Rise in price on a good on which a tariff is placed makes products made by domestic firms more attractive

Question 8

What is an infant industry

Answer 8

An industry new to a country, but already established in other countries

Question 9

What is the infant industry argument

Answer 9

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

Question 10

Downsides of tariffs

Answer 10

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

Question 11

Why may retaliation be a reason for trade restrictions

Answer 11

To punish the other country, to convince the other country to remove trade restrictions, to serve as a warning to other countries

Question 12

Why may preventing dumping be a reason for trade restrictions

Answer 12

Dumping may affect a country’s economy in terms of employment and GDP

Question 13

What is Dumping

Answer 13

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

Question 14

What is a tariff

Answer 14

Tax on imports or exports

Question 15

What is a quota

Answer 15

Limit on the number of imports allowed for a product into a country

Question 16

Why may countries want to provide subsidies for domestic producers

Answer 16

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

Question 17

What is an embargo

Answer 17

An official ban on trade or other commercial activity with a particular country

Question 18

Effect of administrative barriers

Answer 18

Customs impose obstacles to imports and reduce their quantity

Technical standards must be met

Question 19

Define Detractor

Answer 19

A person who disparages someone or something

Question 20

Define Disparage

Answer 20

Regard or represent as being of little worth

Question 21

Define Evangelist

Answer 21

An enthusiastic advocate

Question 22

Define Panacea

Answer 22

A solution or remedy for all difficulties or diseases

Question 23

Why do developed countries use protectionist policies

Answer 23

To industrialise

Question 24

When is protectionism vital

Answer 24

At early stages of development to support infant industries

Question 25

How can protectionism be harmful

Answer 25

When there isn’t an effective development strategy

Question 26

What must occur for protectionism to be effective

Answer 26

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

Question 27

What is the Impact on Producers due to Protectionism

Answer 27

Gain an advantage over foreign competitors - state support

State support is dangerous as firms can become inefficient

Question 28

How can an economy gauge the development and quantity of their domestic goods

Answer 28

By comparing it to foreign goods and exporting

Question 29

What is the Impact on Consumers due to Protectionism

Answer 29

They suffer - embargoes and quotas limit choice

Tariffs make goods more expensive

Question 30

What is the Impact on Workers due to Protectionism

Answer 30

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

Question 31

What is the Impact on Governments due to Protectionism

Answer 31

Tariffs provide large amounts of revenue for developing countries

Can win political support and protect industries in developed economies

High operating costs