Restrictions of free trade

Trade barriers

A restriction placed by the government on the importation of a foreign good

Free trade

Occurs when people can trade internationally with no trade barriers

Restrictions of free trade (RoFT)

1) Tariffs
2) Quotas
3) Subsidies to domestic producers
4) Non-tariff barriers

Tariffs (RoFT)

• ↑ price of imports

• ↓ incentive for domestic consumers to demand goods internationally

Quota

Limit on quantity of imports

Quota (RoFT)

Effect:

• Prevents a country from importing goods past a certain point

• Promotes domestic supply

Drawbacks
- No extra tax revenue is made from quotas by the government - no tax has been placed on the imports of the goods

• Severe shortages - There is no way of importing goods once the maximum import has been reached no matter how dire the situation is

Subsidy

When the government gives grants to producers to increase supply

Subsidy (RoFT)

• Reduces the cost of production leading to lower prices domestically

• Restricts free trade as it ↑ incentive for people to demand domestically due to the ↓ prices

Non-tariff barriers

Restricts free trade by setting rules + regulations for imports to follow

Non-tariff barriers (RoFT)

• Restricts free trade as it places rules and regulations on imports making it harder to trade

Reasons to restrict free trade (RtR)

• Preventing dumping

• Protecting domestic employment

• Protecting infant industries

• Health and safety

Dumping

When a firm aggressively cuts prices below AVC in order to force competitors out of the market

Preventing dumping (RtR)

• By international firms setting their prices below AVC it attracts consumers to their goods

• Domestic firms can’t compete and are then forced out of the market

Effects:

• SR = Loss

• LR = Force competitors out + ↑ price to dominate the market

Protecting employment (RtR)

Restrictions lead to decreased quantity of cheap imports

• Forces consumers to demand domestic goods from domestic firms who employ domestic workers

• Keeps employment high

Infant industry

A new or developing industry that requires government protection and support to grow and become competitive

Protecting infant industries

• Restrictions divert consumer attention from international goods and make them focus on domestic firms

• Gives infant industries the chance to develop under sufficient market conditions

Pros of free trade

• Comparative advantage exploitation and allocative efficiency

• Lower prices and higher quantity

• Higher profits for firms

• Countries benefit from higher economic growth

• Greater technology diffusion

Cons of free trade

• Overspecialisation

• Unfair trade practices

• Unemployment

• Standard depreciation