Traffis/retaliation/protectionism Flashcards
Why might a government restrict free trade
Protect infant industries
Retain self sufficiency
Correct imbalances on the current account of the balance of payments
To retaliate against restrictions imposed by another country
To prevent dumping
Reduce competition from countries with cheap/poor labour and environmental law.
Protect strategic industries eg defence, energy etc
What are quotas?
Quotas are physical limits on the quantity of a certain good that can be imported.
What are 2 other kinds of restrictions on trade other than tariffs and quotas?
Subsidies to domestic producers
Non-tariff barriers eg health and safety regulations, environmental regulations and labelling of products.
Impact on consumers of restrictions to free trade
Consumers may face higher prices for imports through tariffs or limited supply of goods through quotas.
What impact can protectionist measures have on domestic producers?
Could benefit them as it makes goods that are imports more expensive reducing competition however, if they are a producer that uses imports subject to tariffs, they may suffer.
Impact on the government from restrictions of trade?
The government may benefit in the short run from restrictions on trade because they will receive tax revenue on tariffs.
However in the long run, if the protectionism results in a less efficient industrial sector, future economic growth may be lower.
What is the impact on living standards of trade restrictions?
May protect living standards due to protecting jobs.
However, in the long run the industry might loose competitiveness and then face contraction. As a result, unemployment in the industry may rise and then the living standards of the workforce might deteriorate.
Impacts of restrictions on free trade on equality?
Trade unions aim for equality and are often in favour of greater restrictions to protect their members. Free trade may result in competition leading to some people losing their jobs.
model answer trafff diagram
Under the conditions of free trade, the market for steel is initially in equilibrium where Q4 steel is bought and sold at price Pw.
Q1 quantity of steel is supplied by domestic producers and Q4 – Q1 quantity of steel is produced by foreign producers.
A tariff is an indirect specific tax on imported goods and services, which shifts S(world) up to S(world) + tariff. The market is now in equilibrium where Q3 steel is bought and sold at a higher price of Pw+t.
Domestic producers benefit as they now produce the higher quantity Q3 of steel and receive the higher price Pw+t.
Domestic producer surplus rises by the area A. Foreign producers are negatively impacted as they now sell the lower quantity Q3-Q2 of steel at the same price Pw.
Consumers are negatively affected as they now pay a higher price and buy a lower quantity of the good, losing [ABCD] of consumer surplus; in the case of steel this is likely to affect all manner of goods in which steel is a factor of production.
The government gains C of tariff revenue, while B and D are deadweight welfare loss as a result of inefficient domestic production and a smaller market size.
unemployment argument
Used to have revenue now have bigger revenue for us steel producers therefore creating a derived demand for labour in particular low skilled workers who were structural unemployed ( due to globalisation jobs were transferred to countries who had the comparative advantage in making steel) reducing unemployment )(likely to have been occupational unemployment mismatch between jobs aviable and workers looking for that job resulting in structural unemployment ) boasting AD. Furthermore the steel industry is a sunset industry
Some workers may be older therefore harder to train and the easily way out would be bring the jobs back as you can reemploy those people
net trade argument
By creating a traffi you are affecting net trade
Getting a leakage - reducing if imports fall will shift ad right words because imports are a conpomnet of ad
Economic growth creates a driven demand for labour this isn’t just steel works which will reduce cyclical unemployment
Retaliation when china retaliate us exports are going to go down which impacts the ad and the jobs
Pes if the supply is elastic then an increase in the price is going to result in a bigger impact
Therefore the more elastic the supply is will have a larger impact on the derived demand on steel works reducing strucatl unemployment more therefore have a more significant effect
inequality agruement
Finally the effect on inequality
The structural unemployment effect that we saw above will increase the income of low earners
As a result you will see an improvement in the distrubitution of income therefore the mini confident which in the us is 0.49 which is high therefore as a result the distribution of income will become more equal as the mini coefinet will fall
Because od the trade war you will see us prices working toys and cloths will be disportionlyt effecting the poor more but it could also leas dot cost push inflation affecting a whole range of items increasing their prices which the poor buy as a greater proportion of their income which could reverse the effect which means it could make it more unequal
Bricks the caught up growth they have had form globalisation could slow down therefore the inequality level between nations could slow down and become worse.
conc
In conclusion - the greater the realisation the greater the negative effect on both will be. In the short run their could be specific good effect for the us on specific stakeholders like the domestic industryt but there are a whole lot of negative effect like for example the us consumers of example domestic employment
Deepening on their dependence for each other will have a negative effect on everything
why do firms want a high PES
This is because a high PES makes the firm more competitive than its rivals and it allows the firm to generate more revenue and profits.
