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Reasons why government imposes trade restrictions
protects domestic industries
protects employment, reduces unemployment
correct balance of payment deficits
infant companies
dumping
national security
public health & safety
introduction to disadvantages of the government imposing trade restrictions
protects domestic industries HOWEVER
creates several significant disadvantages for;
→ consumers
→ businesses
→ international market
Cons in trade restrictions
higher prices for consumers
limited consumer choice
reduced competition
retaliation from other countries
slower economic growth
misallocation of resources
corruption and bureaucracy
protect domestic industries points
protects domestic industries that are unable to compete with large & established foreign firms
large companies benefit from economies of scale which allows them to produce goods @ lower costs
results in local businesses struggling to survive
government imposes tariffs and quotas to reduce foreign competition & allows for domestic firms time to compete
eg; malaysia’s protection of automotive industry (perodua & proton) via high import duties on foreign cars
protect employment & reduce employment points
cheap imported goods flood the market → domestic firms lose sales/forced to cut production → leading to job losses
TR maintain demand for locally produced goods therefore preserving jobs
eg; restricting imports of cheap textile from china & bangaldesh sustains employment in local manufacturing companies
correct payment deficit points
country imports more than it exports → experiences trade deficit → currency & economy is weakened
limiting exports via tariffs & quotas reduces outflow of money & stabilizes balance of payments
eg; increasing taxes on imported luxury goods can discourage excessive spending on foreign products
infant industries
new industries require time to develop;
→ skills
→ technology
→ efficiency
temporary protection allows them to grow w/o being immediately outcompeted by established foreign firms
eg; government restricts foreign electric vehicle imports to allow domestic EV industry to develop
dumping points
foreign firms sell products @ extremely low prices (sometimes below costs) to eliminate competition & have more appeal → creates unfair market conditions
government executes anti-dumping duties to ensure fair competition
eg: cheap imported steel sold below cost can harm local producers
national security points
defence, energy & advanced technologies industries are crucial to country’s safety
relying heavily on foreign suppliers pose risks during political conflicts
governments restrict trade in sensitive goods to maintain independence & security
protect public health & safety points
retaliate against other countries’ trade barriers
eg; banning contaminated food imports protects consumers → retaliatory tariffs could be used in response to unfair trade practices by other nations