restrictions on free trade/ protectionism Flashcards
what is protectionism?
practice of shielding a countries domestic industries from foreign competition by taxing imports- any barrier that may restrict free trade
what are different types of protectionism?
tariffs
import quotas
voluntary export restraints
export subsidies
domestic subsidies
administrative restrictions
embargoes
what are the arguments for protectionism and how could you evaluate some of these points?
- infant industries- allows new firms to grow by putting taxes on imports that come in so they can develop the same types of economies of scale to compete with rival firms
- protect against dumping
- protect domestic employment if there may be a lot of structural unemployment because of how difficult it is to compete with firms abroad which may lead to industries declining
- protect against unfair low cost labour abroad through protectionism if they feel they cant compete
- protect product standards e.g dangerous, contaminated products
- raise gov revenue through tariff (which is a tax on imports) which can fund e.g education
- improve current account deficit as imports are a withdrawal from the circular flow of income
avoid risk of over specialisation so they can develop other industries because if an industry that theyve over specialised in goes into decline, there would be other industries there which can produce products to cell- dont rely on one industry
how can you evaluate protectionism
-retaliation may occur
-however allowing room for inefficiency when protecting infant industries
if industry is already declining, protectionism is longing out this decline when protecting domestic firms from declining due to international competition
what is dumping?
when a country decides to sell a good or service below their cost of p due to excess supply which affects the country that those goods are going into
what are characteristics of world suppliers?
have comparative advantage
can charge a lower price than it would be in the domestic market
perfectly elastic
what are tariffs and what do they cause?
tariff is tax on imports
it shifts world supply curve upwards due to excess demand → tariffs make goods more expensive for consumers which may improve current account deficit
draw the effects of tariffs diagrammatically and annotate with what each part of the diagram means
difference between Sw + tarrif and Sw is the value of the tariff
raising the price- domestic supply increased Q1 - Q3, domestic demand decreases Q2 - Q4
- therefore decreases imports coming into the country
- 1- represents tariff revenue- tariff is the cost per quantity
- 2- dead weight welfare loss of consumer surplus
- 3- deadweight welfare loss of world efficiency- resources are being supplied to inefficient producers
- 4-supply represents marginal cost of p (cost of p for every additional unit produced). world supply = same cost for every additional unit produced
- but for domestic suppliers, to produce after Q1 they are less efficient than world suppliers as their cost of p would be a but more until Q3
what are the effects of tariffs?
- price inc from Pw to Pw + tariff
- domestic demand decrease from Q2 TO Q4
- domestic supply inc from Q1 TO Q3
- imports dec from Q1Q2 TO Q3Q4
- domestic producer revenue (Pw x Q)- increases
- foreign producer revenue- decreases as foreign producers dont keep all of the revenue- some is given to govt due to tarrif (gov revenue)
- consumer surplus decreases (area above price and under demand)
- producer surplus (area above supply curve, under price)- increases
- dead weight losses
- protect infant industries
protect against dumping - increase domestic labour
- improve current account position
what are the disadvantages of a tariff
- distorts the market- increases prices, decreases choice and therefore decreases consumer surplus (market distortion is when interference in a market significantly affects prices, resource allocation etc)
- production inefficiency/ inefficient allocation of resources- loss of world efficiency since domestic supply is producing more at a higher price compared to world supply
- retaliation from nation in which tariff is imposed- hurts consumers as it increases prices , worsens inefficiencies and could lead to trade wars
- tariffs are regressive- consumers bear that burden especially those on lower incomes
- X inefficiencies leading to higher AC and prices
- not tackling the route of the problem which is that the businesses in the country arent competitive enough (they should tackle this by using supply side policies)
how can you evaluate the disadvantages of tariffs?
size of tariff and therefore the size of its effect
elasticity of supply/ demand- if inelastic good number of imports wont fall by a great amount
what is a quota?
quantity limit placed on the number of imports coming into a country
draw a diagram to illustrate the effects of a quota on a market?
what are the effects of quotas?
leads to excess demand
dead weight of consumer surplus
loss of world efficiency
protect infant industries
protect against dumping
create domestic employment
low cost labour
improve current account position
why does a quota lead to excess demand?
demand cant be satisfied by imports
draw a diagram to show the effects of a subsidy + explain the diagram?
price unchanged at Pw, domestic demand unchanged- remains at Q2
domestic supply shifts outwards so at world price theyre willing to supply more at a higher price (theyre incentivised)
but demand stays the same
