4.1.6 Restrictions on free trade

What are the 4 types of restrictions on free trade?

Tariffs , a tax on imported goods.
Quotas , a strict limit on the quantity of goods imported
Subsidies to domestic producers
Non-tariff or non tariff barriers such as environmental regulations

What is predatory pricing?

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

What is 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.

In Algeria, demand for cheaper cars imported from Morocco increases. What is the likely impact of this on the market for Algerian cars?

There is a left shift in the demand for Algerian cars - demand has decreased

How are trade barriers used to protect domestic jobs?

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.

Why are subsidies to domestic producers a type of restriction on free trade?

Subsidies to domestic producers will reduce the cost of production. This shifts supply to the right, which will decrease the price of domestic goods. This encourages consumers to switch from imports to domestic goods and leads to an extension along the demand curve.

Why do governments provide subsidies to 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.

Write the definition of: Reasons for Restrictions on Free Trade

A country may impose restrictions on free trade to; prevent dumping, protect domestic jobs, protect infant industries and improve health and safety standards.

Write the definition of: Dumping

Dumping is where foreign firms aggressively cut their prices, below average variable costs, to force out domestic producers from a market. 

Write the definition of: Infant Industry

New industries which do not benefit from economies of scale and can’t compete with larger industries from other countries.