Restrictions on free trade

Reasons for restrictions on free trade?

• Protection from dumping: Where a country offloads its surpluses to other countries at very low prices (compared to market equilibrium), harming domestic producers (e.g. China has tariffs on steel tubes from the EU and Japan)

• Improve terms of trade and current account trade deficit: Demand for imported goods falls, so price of imports falls, therefore can buy more imports with the same amount of exports

• Prevent danger of over-specialisation: Some industries considered too important to become totally reliant on another country for

• Protect infant industries: New industries will have high costs, due to no economies of scale, and a small customer base, therefore not competitive in international market. Gives them time to grow and develop

• Raise tax revenues: Tariffs are indirect taxes, so can be used to raise tax revenue

• Job protection: Prevents domestic producers from losing out to cheaper imports from international firms with comparative advantages, which would lead to structural unemployment

What are tariffs and how do they restrict free trade? Include diagram

• Taxes placed on imported goods which make they more expensive to buy (pushing prices closer to domestic prices)

• From diagram, shows a fall in imports, increased tax revenue and producer surplus, but inefficient as they cause deadweight loss

What are quotas and how do they restrict free trade?

• Limits placed on the level/amount of imports allowed into a country (Limited supply indirectly pushes up price of imports)

• Consumers forced to buy domestic goods if they want that good and domestic producers encouraged to produce more

• E.g. U.S. has steel import quotas and EU has textile quotas

What are subsidies to domestic producers and how do they restrict free trade? Include diagram

• Payments to domestic producers which lowers their cost of production (usually to firms that have a lot of their sales as exports)

• Makes them more competitive by increasing domestic supply and lowering prices

• From diagram, shows fall in imports, from Q1Q3 to Q3Q2

What are non-tariff barriers and how do they restrict free trade?

Regulations and restrictions to make trade more difficult and potentially more expensive for firms.

Examples:

• Embargo, which is a total ban on imported goods

• Introduce import licensing, forcing international firms to apply for a limited number of licenses, restricting level of imports

• Use of legal and technical standards, preventing some products from being sold in the country, if criteria not met (e.g. Japan’s strict safety standards on fruits)

• Managed exchange rates to change relative prices of imports and exports (e.g. China accused of keeping yuan undervalued through central bank intervention, making Chinese exports cheaper and imports more expensive)

Impact of protectionist policies on consumers

• Suffer from higher prices, as imports become more expensive

• Price of domestically manufactured goods also rises due to more expensive imports of raw materials

• Less competition means less incentive to be efficient, so goods more expensive, quality falls, and less choice

Impact of protectionist policies on domestic producers

• Reduced international competition, means they can sell more goods at a higher price and afford to be less efficient

• However, may suffer from higher costs as imported raw material more expensive

• More efficient foreign producers lose out, as they are limited as to where they can sell their goods

Impact of protectionist policies on workers

• More jobs created in domestic industries leading to more employment

• However, less jobs for countries that rely heavily on exporting goods into that country

Impact of protectionist policies on governments

• Increase in tax revenues from tariffs and also more corporation tax from domestic firms’ profits

• However, can lead to an inefficient economy with minimal growth

• Subsidies also incur an opportunity cost

• Retaliation by other countries can lead to trade wars, causing reduction in trade and growth overall (e.g. US-China trade war)

Impact of protectionist policies on living standards and equality

• More domestic jobs means more wages, therefore workers have a higher standard of living

• Consumers also protected from cheap and low quality foreign goods

• However, tariff diagram shows a deadweight loss incurred

• Foreign goods may actually be of better quality and cheaper

• Less trade from trade wars reduces output, and hence less jobs

• Tariffs are indirect taxes, therefore have a regressive effect in income redistribution, as the poor spend a larger proportion of income on the goods, so more affected