Trade, Free Trade and Protectionism

Question 1

Dumping

Answer 1

Selling large quantities of a good, usually commodities, at a price lower than its production cost from one country to another

Question 2

Protectionism

Answer 2

Where a country erects barriers against trade to protect the domestic economy from the disadvantages of free trade

Question 3

Reasons for Free Trade

Answer 3

• Increase variety (not all countries have a spread of natural resources)
• Import inputs for production
• Allow countries to specialise in the production of the good they are best at (i.e. lowest opportunity cost/comparative advantage)
• To take advantage of economies of scale
• Increase competition
• Technology transfer

Question 4

Reasons for Protectionism

Answer 4

1. Protecting domestic employment
2. Protecting sunset industry
3. Protecting sunrise industry
4. Promote domestic goods
5. Over Specialisation risks
6. Strategic reasons/National security
7. Prevent dumping
8. To protect product standards: Safety, Health, or Environmental standards
9. To raise government revenue

Question 5

Reasons againsts protectionism

Answer 5

• Protectionism reduces choice and competition
• Government may protect the wrong industries
• Protectionism raises prices for consumers and for producers importing inputs
• Protectionism distorts comparative advantage and leads to inefficient use of the world’s resources (loss of economic welfare)
• Domestic firms become inefficient and lack innovation (market distortion)
• No incentive to pursue the least cost method of production or adapt to the latest technology (e.g. Syrian steel)
• Hinders economic growth and innovation
• Retaliatory actions; trade wars

Question 6

Comparative advantage

Answer 6

• When a country can produce a good at a lower opportunity cost than another country.
• A country has to give up fewer units of other goods to produce a good in comparison to what another country would have to give up.

How to calculate:

• Comparative advantage for a = b/a (a in denominator)
• Comprative advantage for b = a/b (b in denominator)

Question 7

Absolute advantage

Answer 7

When a country can produce a good using fewer resources than another country

Question 8

Quota

Answer 8

A restriction on the physical number (volume) or value of a particular import.

Question 9

Tariff

Answer 9

A tariff is a tax on imports

Question 10

Subsidy

Answer 10

A payment per unit to produce from the government to suppliers in order to lower the cost of production.

Question 11

Trade diversion

Answer 11

When the entry of a country into a customs union leads to the production of a good or service transferring from a low-cost producer to a high-cost producer

Question 12

Trade creation

Answer 12

When the entry of a country into a customs union leads to the production of a good or service transferring from a high cost producer to a low cost producer

Question 13

Sunset industry

Answer 13

Industry where the potential comparative advantage has declined and they are not making enough profit to invest and modernise

Question 14

WTO Functions

Answer 14

1. To set and enforce rules for international trade
2. To resolve trade disputes
3. To provide a forum for negotiating and monitoring further trade liberalization
4. To monitor further trade liberalization

Question 15

Administrative barriers

Answer 15

1. Red Tape
2. Health and safety/environment standards
3. Embargoes/Sanctions
4. Nationalistic campaigns
5. Voluntary Export Restraints (VER)
6. Import license

Question 16

Red tape

Answer 16

Countries can make it difficult for firms to import by imposing restrictions and being ‘deliberately’ bureaucratic (red tape).

Question 17

Health and safety/environment standards

Answer 17

• Health & Safety & Environmental Regulations
• Preferential trade policies
• Intellectual property laws (patents and copyrights)
• Exchange controls - limiting the amount of foreign exchange that can move between countries

Question 18

Embargoes/Sanctions

Answer 18

Embargo - total ban on the import of a particular good
- A complete ban on trade with a particular country as part of the political priorities of a country

Sanctions - type of embargo where a particular good or country is targeted

Question 19

Nationalistic campaigns

Answer 19

Policies which are guided by the idea of protecting a country’s home economy (i.e. protecting domestic consumption, jobs and investment)

E.g. “Moral suasion” - marketing by a government to encourage domestic purchases over foreign, and often linked to employment.
E.g. China’s controlled exchange of the yuan

Question 20

Voluntary Export Restriction (VER)

Answer 20

Where one country will ‘voluntarily’ restrain its exports to another

Question 21

Import license

Answer 21

A payment to the government for the right to import

Question 22

Free Trade Diagram

Answer 22

Question 23

Tariff Diagram

Answer 23

Question 24

Evaluation for Tariff

Answer 24

• Only be effective if the import is elastic
• Help to protect the loss of relatively low skilled and low paid jobs in competitive industry

Question 25

Subsidy diagram

Answer 25

Question 26

Quota diagram

Answer 26

Question 27

Evaluating a subsidy
(winners vs losers)

Answer 27

Question 28

Evaluating a tariff
(winners vs losers)

Answer 28

Question 29

Evaluating a quota
(winners vs losers)

Answer 29