Restrictions on free trade

Question 1

Reasons for restrictions on free trade (protectionism)

Answer 1

1. Protect infant industries - without protectionism, infant industries might be unable to compete because they have yet to establish themselves and are too small to benefit from economies of scale (developing countries)
2. Protect geriatric industries - need protectionism b/c these industries need time to restructure and rationalise production = enable to be competitive again (developed countries losing their comparative advantage)
3. Ensure employment protection - cheap imports = threaten jobs in domestic economy = workers demand government to limit imports
4. Prevent dumping - form of predatory pricing = illegal under WTO roles = good exported to another country below the average cost of production
5. Correct a balance of payments deficit on current account - restrictions on imports = reduce imbalance (EVA - can use floating exchange rates to correct this automatically)
6. Restrict imports from countries where health & safety / environment regulations are less stringent = developing countries have an unfair competitive advantage b/c the gov is not as stringent = less production costs = cheaper exports
7. Strategic reasons = e.g. during a time of war so not dependent on imports
8. Raise tax revenue - tariffs are important source of tax revenue for developing countries
9. Retaliation - impose on a country b/c that country has restricted their imports

Question 2

Types of restrictions of trade

Answer 2

1. Tariffs - taxes on imported goods
2. Quotas - restrictions on the amount of goods that can imported
3. Subsidies to domestic producers = lower their production costs = domestic goods are more competitive
4. Non-tariffs barriers - e.g. labelling, health and safety regulations, environmental standards and documentation in country of origin = increase costs of foreign producers

Question 3

Impact of protectionist policies on consumers

Answer 3

higher prices and less choice

Question 4

impact of protectionist policies on producers

Answer 4

less incentive for domestic producers to become efficient

Question 5

impact of protectionist policies on government

Answer 5

tariffs = tax revenue but subsidies = cost on taxpayers & may become dependent

Question 6

impact of protectionist policies on living standards

Answer 6

protectionism = trade barriers distort comparative advantage and reduce specialisation = less efficient resource allocation = lower world output = lower living standards

Question 7

impact of protectionist policies on equality

Answer 7

trade barriers imposed on developing economies by developed countries = more inequality between the two sets of countries

Question 8

what do protectionist policies impact on

Answer 8

1. consumers
2. producers
3. government
4. living standards
5. equality