4.2-4.3 Restrictions on Free Trade

What is trade protection?

A form of government intervention which limits the entry of imports.

What are tariffs?

Taxes on imported goods.

What are the two types of tariffs?

- Protective tariffs.

- Revenue tariffs.

What are protective tariffs?

Tariffs that aim to protect domestic industry from international competition.

What are revenue tariffs?

Tariffs that aim to generate government revenues.

What happens to the price of an imported good if a tariff is imposed?

Price increases.

Why does the price of an imported good increase if a tariff is imposed?

Pay for the world price + tariff.

What happens to the quantity supplied of an imported good if a tariff is imposed?

Quantity supplied increases.

Why does the quantity supplied of an imported good increase if a tariff is imposed?

Producers are willing to produce and sell more at a higher price.

What happens to the quantity demanded of an imported good if a tariff is imposed?

Quantity demanded decreases.

Why does the quantity demanded of an imported good decrease if a tariff is imposed?

Consumers are less willing and able to buy at a higher price.

What happens to domestic employment in an industry that faces competition from an imported good after a tariff is imposed?

Domestic employment increases.

What happens to domestic employment in an industry that uses an imported good as an input after a tariff is imposed?

Domestic employment decreases.

Why does domestic employment in an industry that faces competition from an imported good increase after a tariff is imposed?

Domestic producers increase output; hence they must hire more labour.

Why does domestic employment in an industry that uses an imported good as an input decrease after a tariff is imposed?

Production is more expensive; firms produce less; lay off excess labour.

What happens to the number of imports after a tariff is imposed?

The number of imports decrease.

How are domestic producers impacted after a tariff is imposed?

Better off; receive a higher price and sell a greater quantity.

How are domestic consumers impacted after a tariff is imposed?

Worse off; pay a higher price for a lower quantity.

How is the government impacted after a tariff is imposed?

Better off; make government revenues.

What is the impact on domestic income distribution after a tariff is imposed?

Worsens.

Why does domestic income distribution worsen after a tariff is imposed?

Tariffs are regressive; more burden on lower income groups.

What is the impact on efficiency after a tariff is imposed?

Decreases; increased inefficiency.

Why does production become inefficient after a tariff is imposed?

Production shifts from efficient foreign producers to inefficient domestic producers.

What is the impact on foreign producers after a tariff is imposed?

They are worse off.

Why are foreign producers worse off after a tariff is imposed?

Export a lower quantity; less export revenues.

What is the impact on the global resource allocation after a tariff is imposed?

Worsens.

Why does global resource allocation worsen after a tariff is imposed?

Shift from efficient to inefficient producers; less consumption.

What happens to consumer surplus after a tariff is imposed?

Decreases.

What happens to producer surplus after a tariff is imposed?

Increases.

What happens to social surplus after a tariff is imposed?

Decreases.

What is an import quota?

Legal limit on the quantity of a good that can be imported.

What is the main difference in terms of outcome between tariffs and quotas?

No government revenues from quotas.

What happens to price after a quota is imposed?

Increases.

What happens to quantity demanded after a quota is imposed?

Decreases.

What happens to domestic quantity supplied after a quota is imposed?

Increases.

Why do foreign governments prefer quotas?

They can make quota revenues by selling import licences.

What is the impact on domestic producers after a quota is imposed?

Better off; receive a higher price and sell a greater quantity.

What is the impact on domestic employment in an industry that uses an imported good as an input after a quota is imposed?

Domestic employment decreases.

What is the impact on domestic employment in an industry that faces competition from an foreign good after a quota is imposed?

Domestic employment increases.

Why does domestic employment decrease in an industry that uses an imported good as an input after a quota is imposed?

Inputs become more expensive; output reduced; less labour required.

Why does domestic employment increase in an industry that faces competition from an foreign good after a quota is imposed?

Producers sell and produce a greater quantity; need to hire labour for this.

What is the impact on the government after a quota is imposed?

No impact.

What is the impact on domestic consumers after a quota is imposed?

Worse off.

Why are domestic consumers worse off after a quota is imposed?

Pay a higher price and receive a lower quantity.

What is the impact on domestic income distribution after a quota is imposed?

Worsens.

Why does domestic income distribution worsen after a quota is imposed?

Higher price is regressive; greater impact on lower income groups.

What is the impact on efficiency after a quota is imposed?

Decreases; increased inefficiency.

Why does inefficiency increase after a quota is imposed?

Production shifts from efficient foreign producers to inefficient domestic producers.

What is the impact on foreign producers after a quota is imposed?

They may be better off or worse off.

When are foreign producers worse off after a quota is imposed?

When loss of export revenues > quota revenues.

When are foreign producers better off after a quota is imposed?

When quota revenues > loss of export revenues.

What is the impact on the global allocation of resources after a quota is imposed?

Worsens; global misallocation of resources.

What are protection subsidies?

Payments per unit of output that compete with imports.

How do production subsidies impact price?

No effect; still at world price.

How do production subsidies impact imports?

Decreases imports.

How do production subsidies impact domestic producers?

Better off; higher price (from subsidy) and sell a greater output.

Why are domestic producers better off with production subsidies?

Receive a higher price and sell a greater quantity.

How do production subsidies impact domestic employment?

Better off; firms hire more workers to increase output.

Why is domestic employment better off with production subsidies?

Firms hire more labour in order to increase output.

How do production subsidies impact domestic consumers?

Not affected.

Why are domestic consumers not impacted by production subsidies?

Pay the same price and receive the same quantity.

How do production subsidies impact the government?

Worse off; government budget used on subsidies.

Why is the government worse off with production subsidies?

Must use government budget to pay for subsidies.

How do production subsidies impact taxpayers?

Worse off; tax revenues fund inefficient producers.

Why are taxpayers worse off with production subsidies?

Tax revenues are used to subsidise inefficient producers; opportunity costs.

How do production subsidies impact efficiency?

Decreases; increased inefficiency.

Why do production subsidies increase inefficiency?

Production shifts from efficient foreign producers to inefficient domestic producers.

How do production subsidies impact exporting countries?

Worse off; export less and lose revenues.

Why are exporting countries worse off with production subsidies?

Export a lower quantity and revenues fall.

How do production subsidies impact the global allocation of resources?

Worse off; global misallocation of resources.

What are export subsidies?

Payments from government to firm for each unit of a good exported.

How do export subsidies impact the price?

Price increases domestically; not for foreign buyers.

Why does the domestic price increase with an export subsidy?

Domestic quantity supplied decreases; firms prefer to gain subsidy by exporting.

How do export subsidies impact producers?

Better off; receive a higher price and sell a greater quantity.

Why are producers better off with an export subsidy?

Receive a higher price and sell a greater quantity.

How do export subsidies impact domestic employment?

Better off; firms hire more labour to increase output.

Why is domestic employment better off with an export subsidy?

Firms hire more labour in order to increase output.

How do export subsidies impact consumers?

Worse off; pay a higher price for a lower quantity.

Why are consumers worse off with an export subsidy?

Pay a higher price for a lower quantity.

How do export subsidies impact the government?

Worse off; use tax revenues to pay for the subsidy.

Why is the government worse off with an export subsidy?

Must use government budget to fund subsidy.

How do export subsidies impact taxpayers?

Worse off; tax revenues fund subsidy.

Why are taxpayers worse off with an export subsidy?

Tax revenues used to fund subsidy; could be used for something more desirable.

How do export subsidies impact domestic income distribution?

Worse off; increase in price is regressive.

Why is domestic income distribution worse off with an export subsidy?

Increase in price is regressive, more negative impact on low income earners.

How do export subsidies impact efficiency?

Worse off; increased inefficiency.

Why is efficiency worse off with an export subsidy?

Inefficient domestic producers are protected.

How do export subsidies impact exporting countries?

Worse off; less exports and less revenues.

Why are foreign exporting countries worse off with export subsidies?

Lose share of global market; less exports and less revenues.

What are administrative barriers?

Rules and regulations for imported goods.

What may be the purpose of administrative barriers?

- Healthy, safety and environmental concerns.

- Limit imports; hidden protection.

What are some examples of administrative barriers?

- Certain packaging.

- Technical standards (health, safety, environmental).

- Testing and inspection.

What is the impact of administrative barriers?

Costly and time-consuming to import; increases domestic price and protects domestic producers.

What are arguments FOR trade protection justified under certain conditions? (4)

- Infant Industry Argument.

- National Security.

- Health, safety and environmental standards.

- Efforts of a developing country to diversify.

What is an infant industry?

A new domestic industry that cannot compete with mature foreign competition.

What is the infant industry agreement?

When infant industries are temporarily protected from foreign competition to allow them to mature and become efficient.

What are the problems with the infant industry agreement? (3)

- Difficult to identify which industries have potential.

- Protected industries have no incentive to become efficient.

- May provide protection even after maturation.

What is the argument of national security?

Industries essential for national defence should be protected so a country can produce; no reliance on imports during war.

What are some goods important for national defence? (4)

- Aircraft.

- Weapons.

- Chemicals.

- Minerals.

What is the problem with the argument of national security?

May be used to protect industries with indirect uses in defence i.e. metal, candles, gloves, plastics.