Economics - Restrictions on Free Trade

What is a trade barrier

restriction placed by the government on the import of a foreign good

What is free trade

When people can trade without any trade barriers, international trade WITHOUT trade barriers/restrictions

Types of restrictions on free trade

Tariffs

Quotas

Subsidies to domestic producers

Non-tariff barriers

What is a tariff

Tax paid on imports

Also known as import/custom duty

Increases the price of an imported good

What is a quota

A strict limit on the quantitiy of imports

What are the drawbacks of a quota

They raise no extra tax revenue

As soon as the quota has been reaches, there is no way to import any extra goods - can create severe shortages

What are subsidies on domestic producers

Subsidy is the government gives a grant to producers to increase supply

• subsidies increase supply and therefore decrease prices

• subsidies to domestic producers cost a government

• grants to lower production costs and increase supply - should lead to lower prices, make a countries domestic good cheaper - more competitive

• domestic consumers will switch to their domestic goods and reduce the quantity of imports they get from abroad - reducing trade

What a non-tariff barriers

1. Label regulation

2. Environmental regulation

3. Health and safety regulation

These restrict free trade by setting rules and regulations for imports to follow

What are the reasons for restriction on free trade

1. preventing dumping

2. protecting domestic employment

3. protecting infant industies

4. health and safety

sometimes known as protectionist policies

Preventing dumping

predatory pricing on an international scale

leads to a loss in the short run, but in the long run leads to market dominance

dumping drives prices so low that domestic firms cannot compete forcing them out the market

trade resticitions prevent dumping - a tariff would increase the price of dumped goods - foreign firms won’t be able to undercut domestic firms

Protecting domestic employment

protecting jobs of workers in that country

country might use a trade barrier to protect employment

cheap foreign imports reduce the demand for domestic goods - decreasing derived demand for domestic labour - decreasing domestic employment

by restricing free trade consumers cant be as many free imports - have to demand domestic goods from domestic firms - keeping domestic employment high

To protect infant industries

infant industries - do not benefit from economies of scale

when industries don’t benefit from economies of scale their production costs are higher than those who do benefit from EoS

high production costs - higher prices - infant industries can compete with large industries

restrictions of free trade - reduces production costs - can sell for lower prices

Health and Saftey

non-tariff barrier like health and safety regulations and labelling help maintain these standards - not allowing unsafe products to be imported

Impacts of protectionist policies on consumers

there are higher prices for cosumers as they are unable to buy imports at the cheaper price

therefore they suffer from less choice

Impact of protectionism policies on producers

benefit from import control since they have less competition so can sell more goods at a higher price

may suffer from higher costs if there are controls on the imports they need for production

foreign producers will loose out as they are limited in where they can sell their goods

Impact of protectionist policies on workers

there is little difference to employment figures

argued that allowing inefficient firms to close would be better for workers in the long run - market would reallocate resources and create new jobs

EG following steel tariffs imposed in America in 2018 its estimated that 16 jobs will be lost elsewhere for every job gained in the steel indsutry

Impact of protectionist policies on governments

in short run governments benefit from protectionist policies as they can gain tariff revenues and they are politically popular

can lead to an inefficient economy

Impact of protectionist policies on living standards

tariff diagram shows the imposition of import controls result in deadweight welfare loss

causes trade wars since the introduction of restrictions often lead to retaliation by other countries

US-China trade war

Impact of protectionist policies on equity

has a regressive effect on the distribution of income as the rise in price affects the poorer members of society more that the well off

What is creeping protectionism

period of time where import tarrif rates rise and where countries introduce quotas and barriers to the mobility of labour and capital

after the crash in 1930s and financial crisis in 2007 protectionism was favoured to protect hard-hit, older industries that needed to be restructured and protect employment from cheap foreign imports than benefit from low labour costs

What is protectionism

The act of guarding a country’s indsutries from foreign competition