Unit 14.3 Flashcards
What are the four types of trade barriers
Tariffs
Quotas
Subsidies
Administrative barriers
What is a tariff
Tariffs are taxes put on imported goods as they enter the domestic economy and have to be paid by the individual or organisation importing the good
What is the impact on stakeholders of putting a tariff (using a graph)
Winners:
Domestic Producers: They benefit from higher market prices (Pw+t) and increased sales (from Q1 to Q2), boosting their revenue and potentially employment in the protected industry.
Government: Receives additional revenue from the tariff, calculated as the tariff amount per unit multiplied by the quantity of imports.
Losers:
Domestic Consumers: Pay more due to the tariff (Pw+t) and purchase less (from Q4 to Q3), thus experiencing a loss in consumer welfare.
Income Distribution: The tariff can disproportionately burden lower-income individuals, acting like a regressive tax and worsening income distribution.
Production Efficiency: Protects less efficient domestic producers, leading to an increase in domestic output by inefficient producers and a waste of scarce resources.
Foreign Producers: Face reduced sales and revenues since they receive a lower world price (Pw) and the quantity of their exports to the tariff-imposing country decreases.
Global Resource Allocation: Tariffs cause a shift from more efficient foreign producers to less efficient domestic producers, leading to misallocation of resources on a global scale and a net welfare loss.
What is a quota
A quota is a method of trade protection where a domestic government sets either a value or a quantity limit on imported goods into the domestic economy.
What is the impact on stakeholders of putting a quota (using a graph)
Domestic Producers: Benefit from quotas as they can sell more at higher prices due to restricted imports, leading to increased producer surplus.
Foreign Producers (Importers): Face reduced volume of exports due to quotas but can benefit from increased prices within the quota limit, earning quota revenues.
Consumers: Are negatively impacted by quotas through higher prices and reduced availability of goods, resulting in a significant drop in consumer surplus.
Government: Does not gain any revenue from quotas, unlike tariffs, missing out on potential tax income.
Society: Experiences welfare losses due to inefficiencies from shifting production to less efficient domestic producers and from reduced consumer surplus due to higher prices and decreased availability of goods.
What is a subsidy
A subsidy is a payment per unit of output from the government to a specific industry to help lower production costs and boost production
What is the impact on stakeholders of putting a trade .subsidy (using a graph)
Domestic Producers: Benefit from subsidies, increasing production and receiving higher total revenue due to the subsidy amount. Their producer surplus increases, reflecting the financial gain from subsidies.
Foreign Producers: Suffer due to subsidies as their sales decrease, impacting their market share and revenue in the subsidized market.
Consumers: See no change in price or consumption levels due to the subsidy. They shift purchases towards more domestically produced goods, with consumer surplus remaining unchanged.
Government: Faces financial costs from providing subsidies, impacting its budget and allocating resources away from potentially other important sectors like health and education.
Society: Experiences welfare loss as subsidies cause a shift towards production by less efficient domestic producers, leading to resource misallocation and overall inefficiency.
What is a export subsidy
Export subsidies are a payment made by the government to producers on each unit they export. The aim of a government using an export subsidy is to encourage domestic producers to increase the amount they export.
What is the impact on stakeholders of putting a export subsidy (using a graph)
Winners:
Producers: They benefit from both higher prices due to the subsidy (Pw+s) and increased sales (from Q2 to Q4). This increases the volume of exports (from Q2 - Q1 to Q4 - Q3) and boosts domestic employment.
Losers:
Consumers: Pay more for subsidized goods (Pw+s vs. Pw) and reduce their consumption (from Q1 to Q3).
Government Budget: The subsidy impacts the government budget negatively, as it has to pay the subsidy amount per unit of exported goods.
Taxpayers: They indirectly fund the subsidies through taxes and lose out on government spending that could be allocated to other public goods.
Income Distribution: Worsens as the subsidy can act like a regressive tax; lower-income consumers pay a higher proportion of their income due to the increased prices from subsidies.
Production Efficiency: Subsidies can result in inefficiency by protecting less efficient domestic producers who then don’t have the incentive to improve.
Exporting Countries: Suffer as they lose market share and their global market worth decreases, leading to reduced export revenues
What is an administrative barrier
Administrative trade barriers are where the government imposes excessive rules, regulations and bureaucracy on imported goods. Governments can use administrative barriers to try and reduce imports and protect the country’s domestic producers. Administrative barriers can be used as ‘hidden’ trade restrictions to protect domestic producers and reduce the threat of other countries retaliating.
What are the different types of administrative barriers
Bureaucracy
Governments sometimes put complicated, time-consuming bureaucracy in the way of imports which effectively acts as a trade barrier. The French government once directed the imports of electronics goods through a single customs post in a small town which greatly increased the processing time for imports and acted as a trade barrier.
Health and safety standards
Governments often impose strict health and safety standards on imported goods which act as trade barriers. The EU has banned the import of hormone-treated beef which acts as a trade barrier to US imported beef, much of which is hormone-treated.
Environmental standards
Governments can restrict the import of products that they claim do not meet set environmental standards. In the past, the US has restricted imported tuna from Mexico because they claimed the Mexican fishing boats used fishing nets that killed Dolphins.
Government contracts
Governments can restrict imports by only awarding government contracts to domestic firms. The US recently awarded the contract for the manufacture of all its military uniforms to US producers.
Patriotic or nationalistic campaigns
Governments can put pressure on their citizens to purchase domestically produced goods by making the purchase of imports seem unpatriotic. Japan is often seen as a country where their cultural pressure to buy domestically produced goods.
