Restrictions on Free Trade Flashcards
What is the general main reason why restrictions are placed on free trade?
Protectionism
Why are restrictions placed on free trade (arguments supporting need for protectionism)?
1) Protect infant industries- relevant to developing countries- in process of industrialisation- yet to establish themselves and too small to benefit from economies of scale (lower cost per unit of output)
2) Domestic employment protection- cheap imports-> ⬇️ demand for domestic 🚘 and 🧹… unemployment as firms ✖️ afford to keep workers with little demand
3) To prevent dumping- when businesses ⬇️ sales price of exports to unfairly gain market share- ⬇️ product’s price below what it would sell for at 🏠 and may even push price below actual cost to produce- ⬆️ price once other nation’s competition (domestic industries) destroyed-> unfairly distorts comparative advantage- illegal under WTO rules
4) To correct balance of payments deficit on current account- import restrictions-> ⬇️ in imbalance between value of imports and value of exports
5) To ⬆️ tax revenue- developing countries may benefit from tax revenue- spend within nation
6) Retaliation- barriers to trade imposed because another country restricted imports of its 🚘 e.g. 🇨🇳 and 🇺🇸 tariff war
What are the types of restrictions on free trade (measures of protectionism)?
1) Tariffs
2) Quotas
3) Subsisdes to domestic producers
4) Non-tariff barriers
5) Fixing currency value artificially if exchange ✖️ freely floating
How many types of restrictions on free trade are there (measures of protectionism)?
5
What are tariffs?
Tariffs (customs duties)- taxes on imported 🚘-> ⬆️ price for imports … domestic firms gain ⬆️ business
Government receives tax revenue
What are quotas?
Quotas- physical restriction on amount of 🚘 that can be imported-> ⬆️ price of imported goods as ⬆️ (like tariffs) scarce … domestic producers gain ⬆️ business
BUT government ✖️ receive revenue unlike tariff
What are subsidies to domestic producers?
Subsidies to domestic producers- ⬇️ production costs for domestic firms -> their 🚘 ⬆️ competitive
What are non-tariff barriers?
Non-tariff barriers- have different forms e.g. labelling, health and safety regulations, environmental standards and documentation etc-> ⬆️ costs of foreign producers … foreign 🚘 ⬆️ expensive
Describe the tariff diagram
Price quantity x and y axis
Normal straight demand curve (labelled domestic demand) and normal straight supply curve (labelled domestic supply)
Horizontal world 🌎 supply curve (below world 🌎 supply + tariff curve)
Horizontal world 🌎 supply + tariff curve (above world 🌎 supply curve)
Describe the key points on the tariff diagram
Price- 0P1 (before tariff imposed) and 0P2 (after tariff imposed)
Domestic output- 0A (before tariff imposed) and 0E (after tariff imposed)- ⬆️ because firms profit maximisers
Domestic demand- 0B (before tariff imposed) and 0F (after tariff imposed)- ⬇️ because of ⬆️ price
Imports- AB (before tariff imposed) and EF (after tariff imposed)- because domestic demand ⬇️ and domestic output ⬆️
Tax revenue to government- QLMR (after tariff imposed)
Net welfare loss- NLQ and RMT (after tariff imposed)
SEE TOP OF PAGE 15 IN THEME 4 BOOK
What are impacts of protectionist policies on consumers?
Higher ⬆️ prices and ⬇️ choice
What are impacts of protectionist policies on producers?
⬇️ incentive for domestic producers to become ⬆️ efficient
What are impacts of protectionist policies on governments?
Government receives tax revenue from tariffs BUT cost if subsidy introduced (funded by taxpayers)
ALSO once protectionist measures introduced- difficult to remove as-> 👎 effect on domestic producers
What are impacts of protectionist policies on living standards?
Protectionism-> ⬇️ efficient allocation of resources (trade barriers distort comparative advantage and ⬇️ specialisation)-> ⬇️ world output and … ⬇️ living standards
What are impacts of protectionist policies on equality?
Trade barriers imposed by developed economies on 🚘 from developing economies-> ⬆️ inequality between 2 countries
