Restrictions on free trade

Trade barrier

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

Tariffs

tax paid on imports, also known as import duties, custom duties

Quotas

strict limit on quantity of imports

drawbacks of quota

1)raise no extra tax revenue for government

2)create severe shortage

Subsidy to Domestic Producer

Grants given to domestic producers by the government in order to encourage supply and reduce price. This will decrease demand for imports.

Non tariff barriers examples

regulations regarding health and safety, environmental regulations and correct labelling of products to show a best before date.

Non tariff barriers

Restrict free trade by setting rules and regulations for imports to follow.

Predatory pricing

when a firm aggressively cuts prices below average variable costs in order to force competitors out of the market.

Dumping

Dumping occurs when foreign firms aggressively cut their prices below average variable costs. This means that domestic producers can’t compete, forcing them out of the market.

Reasons to restrict free trade

1)prevent dumping

2)protecting domestic employment

3)protecting infant industries

4)health & safety

Prevent dumping

A trade barrier can be used to prevent dumping. For example, a tariff will increase the price of imported goods so that foreign firms won’t be able to undercut domestic firms by charging a lower price.

protecting domestic employment

Trade barriers can be used to protect domestic jobs. A restriction on imports will increase demand for domestic goods. This will increase the derived demand for labour and increase employment.

Protecting infant industries

Infant industries do not benefit from economies of scale. This means that their cost of production is often higher than other countries. This means that they can’t compete with large industries from other countries. Subsidies to domestic producers can help reduce the price of their goods.

Health & safety

Trade barriers can be used to reduce imports of goods which do not meet health and safety regulations.