Restrictions on Free Trade Flashcards
Free Trade
International trade conducted without the existence of barriers to trade, such as tariffs or quotas.
Subsidies can also be used to increase exports and reduce imports. Export subsidies are when subsidies are provided to domestic producers to produce more, reducing prices and thus able to export more. This will also reduce the demand for imports.
Protectionism
The use of economic policies to regulate trade between countries mainly to reduce imports.
Quota
A physical limit on the quantity of a good imported. Imposing a limit on the quantity of goods imported into a country will increase the share of the market available for domestic producers. However, it will also raise the price of the protected product.
Tariff, import duty or customs duty
A tax on imported goods which has the effect of raising the domestic price of imports and thus restricting demand for imports (although sometimes, foreign suppliers will absorb the tax in order to avoid this). Tariffs will also help domestic producers because they will appear cheaper, thus people will purchase from them.
Trade Barriers
Any measure which artificially restricts international trade
Reasons for Restrictions on Trade
Dumping - The sale of goods at less than cost price by foreign producers in the domestic market.
Job Protection
The Infant Industry Argument - protect new start ups
Cheap labour - Countries which have plentiful sources of cheap labour are often accused of unfair competition.
The Terms of Trade
Administrative Barriers
Administrative barriers can be implemented in order to reduce imports or encourage exports. One way is to impose product standards that differ from those in other countries. This raises the costs to importers because they have to adapt their products to the product standards set. Or they may just simply ban the import of a good because of a perceived problem.
Impact of Protectionist Policies
Consumers - Protectionism tends to harm the interest of consumers, either they are unable to import the good at a cheaper rate, or suffer restrictions on a range of goods being offered to them for sale, their choice is therefore restricted.
Producers - Domestic firms can both gain and suffer from protectionism. Domestic firms can experience higher sales within their own country, thus increasing profits, however, for raw materials, they may have to pay higher prices if protectionist policies also affect the import of raw materials.
Workers - Jobs are protected
Governments - Tend to benefit in the short term. If tariffs were imposed, they will experience higher tax revenues. If jobs are protected, they don’t have to impose more government spending on welfare benefits, and the workers will also pay more taxes, increasing tax revenue. However, in the long run, governments may lose out, if protectionist policies result in an inefficient economy where growth is restricted. Their tax revenues will be smaller and they may have to pay out ore in welfare benefits if unemployment is higher or worker’s wages are too low to support them.
Living Standards - Protectionism in the short term may protect living standards. However, if protectionism leads to a less efficient, slower growing economy in the long run, then there will be a negative impact on living standards.
Equality - Trade unions are in favour of protectionist policies. They want to protect their member’s jobs against unfair competition from abroad. Trade union membership tends to be associated with higher wages than would be the case if the firm or industry were not unionised. So protectionist policies may serve to create greater equality where unionised jobs are threatened. May also lead to more equal distribution of income.
