Trade

Question 1

Protectionism

Answer 1

Protectionism: Act of guarding country’s industries from foreign competition

Question 2

Methods of Protectionism & Their Impact

Answer 2

Tariffs: Taxes on imports to a country, could lead to retaliation, so exports may decrease
- Can cause demand of domestic goods to increase, while demand of imports decreases

Quotas: Limits quantity of foreign good that is sold on domestic market
- Sets a physical limit on a specific good imported in a set amount of time
- Leads to rise in price of good for domestic consumers, so they become worse off

Export Subsidies: Form of gov. intervention, encourages goods to be exported rather than sold on domestic market
- Gov might use direct payments, tax relief, or
provide cheap access to credit

Embargoes: Complete ban on trade w/ particular country, usually politically motivated

Excessive Administrative Burdens (‘red tape’): Increases the cost of trading, discourages imports
- Makes difficult to trade w/ countries imposing red tape, harmful for developing countries which are unable to access these markets
- Harder to notice, favoured by some countries

Question 3

Causes & Consequences of Protectionist Policies

(Adv. & Disadv.)

Answer 3

Advantages:
Trade deficit would reduce, importing less due to tariffs & quotas
- Infant industries need protecting
- Protectionism usually short term until the industry develops, theN industry can trade freely

Used to correct market failure, can deal with demerit goods & protect society

Improve the current account deficit

Governments wants to protect domestic jobs

Disadvantages:
Loss of allocative efficiency, prevents industries from competing in competitive market & is loss of consumer welfare
- Consumers face higher prices & less variety
- No incentive to lower their costs of production

Extra cost on exporters, could lower output & damage economy

Tariffs are regressive, most damaging to those on low/ fixed incomes
- Risk of retaliation from other countries, so countries might become hostile
- Protectionism could lead to government failure

Question 4

Impacts of Trade Blocs

Answer 4

Trade Creation & Diversion: More trade created between members, but diverted from
elsewhere
- Trade Creation: Occurs when a country consumes more imports from a low cost producer, & fewer from a high cost producer
- Trade Diversion: Occurs when trade shifts to less efficient producer (e.g switch to producer inside the trading bloc)
- UK trades mainly w/ EU, at expense of former trade links in Commonwealth

Reduced Transaction Costs: No barriers to trade/ no border controls, cheaper & simpler to trade

Economies of Scale: Firms can take advantage of a larger potential market
- E.g EU has 500 million people to sell to. By specialising, firms/ countries can exploit comparative advantages, gains of efficiency & advanced technology

Enhanced Competition: Firms operate in more competitive market, become more efficient & there is better allocation of resources
- Long run benefits of dynamic efficiency
too, although not always spread evenly across each member

Migration: Supply of labour increases, could help fill labour shortages
- Might mean some countries lose their best workers