Restrictions on free trade Flashcards
What is protectionism?
The use of economic policies to regulate trade between countries mainly to reduce imports
What is a trade barrier?
Any measure which artificially restricts international trade
What is a tariff?
A tax on imported goods which has the effect of raising the domestic price of imports and this restricting demand for them
What are quotas?
A physical limit on the quantity of an imported group
What are subsidies?
A grant given to firms which lowers the price of a good, usually designed to encourage production or consumption of a good
What are non-tariff barriers?
These are regulation which increase costs to foreign producers and therefore act as barriers to trade
What is dumping?
The sale of goods at less than cost price by foreign producers in the domestic market
Why do governments wish to restrict trade?
- Increase domestic production / buying
- Increase competitiveness of exports
- Increase employment and productive capacity
- Improve current account deficit (trade deficit)
What are the evaluations of tariff?
- Impact depends on price elasticity of demand and supply
- Depends on the size of the tariff
- Tariff may protect jobs in the domestic industry but this goes against law of comparative advantage
- Protecting domestic industries may make them less globally competitive
- May lead to retaliation
What are the benefits of removing trade barriers?
- Non-discriminating
- Promotes fair competition
- Beneficial for developing countries
- Predictable trade
What are the costs of removing trade barriers?
- Certain workers may lose jobs and face related hardships
- Industries may become more costly
- Some investment may lose value
- Economies may become too dependant on few production
- Prevents growth and unfair industries
How does restricting trade protect employment and incomes?
Restricting imports may preserve particular domestic industries and the jobs they provide
Evaluation:
- Effect on businesses: rising costs, production costs increase and decreased supply
- Effect on developing countries: poor countries rely on raw materials, net loss of jobs
How does restricting trade reduce unfair competition from countries with cheap labour?
Subsidies to increase productivity and increased supply means goods can be sold at lower price = more attractive
Evaluation:
- Countries could retaliate causing a trade war
- Fairness and competition is subjective
How does restricting trade raise tax revenue?
Generate revenue from tariff depending on size of tariff and quota license
Evaluation:
Developing countries don’t have high incomes = low levels of income tax so have to generate revenue from tariffs
How does restricting free trade preserve strategic industries?
Not relying on foreign industries protects and ensures these businesses are around during war
How does restricting free trade help develop new industries?
The infant industry argument: developing new industries helps diversify the economy, start up industries may face higher costs than foreign competitors who benefit from economies of scale
Evaluation:
- Who determines when a business is ready to have restrictions lifted?
- Restrictions can last years
- Decreases in consumer surplus due to higher prices
How does restricting free trade diversify the economy?
Some countries are very dependant on particular exports - primary product dependancy and protectionist policies protect new infant industries
How does restricting free trade prevent dumping?
Raises costs to foreign producers so they cannot sell below costs
Evaluation:
- Imperfect info
- Difficult to prove if you don’t know production costs
How does restricting free trade correct imbalances of current account?
Reduces imbalance between exports and imports
How does restricting free trade retaliate against restrictions imposed by another countries?
American Chinese trade war
World Trade Organisation and their principles:
Based in Geneva, established in 1995, 166 member states
Principles:
- Non-discrimination
- National treatment policy
- Reciprocity
- Safety values
What are the benefits of WTO?
- Cut living costs and improve living standards
- Encourage good governance
- Stimulate economic growth and development
- Cuts costs of trading internationally
- Promotes free trade
- Increases choice
What are the costs of the WTO?
- WTO takes too long to arbitrate and settle disputes
- Doesn’t confront ethical issues like child labour
- Failed to tackle environmental issues
- May be bias and favour developed countries
