4.1.6 Restrictions on free trade

Question 1

What are the main reasons for protectionism?

Answer 1

1. Infant industry argument – protecting emerging industries until they have achieved economies of scale
2. Sunset industry argument – use tariffs to slow the decline of old sectors and limit structural unemployment
3. Diversify an economy thought to be too dependent on one product (e.g. primary product dependence)
4. Raise tax revenues - this is important for many developing countries with a limited domestic tax base
5. Improve the trade balance & preserve jobs in key industries
6. Prevention of unfair trade practices such as import dumping – where excess output is sold in another country at a price below costs of production. Protectionism can be a retaliatory response to another country’s policies, for example, poor environmental or labour standards.
7. Protect strategic industries – these might include national defence, electricity generation, supply of basic
   foodstuffs

Question 2

When does dumping happen?

Answer 2

• Dumping happens when firms sell exports at below costs or below normal prices in the home market.
  o The former implies predatory pricing – which is illegal
  o The latter implies a strategy of price discrimination – this is not illegal

Question 3

What is a recent example of import dumping for a country?

Answer 3

A topical recent example is the global steel industry. China’s steel industry is experiencing significant excess
capacity and China has been accused of dumping its steel products on the European Union, selling them for
less than they are worth. That makes it harder for EU steel producers to compete

Question 4

What are anti dumping duties?

Answer 4

• Anti-dumping duties (or tariffs) raise the price of a product to help protect local producers
  Anti-dumping tariffs are allowed under WTO rules when cases of dumping have been established.

Question 5

What are three main options when introducing an anti-dumping import duty?

Answer 5

1. An ad valorem duty– % of the net EU frontier price. This is the most common import duty.
2. A specific duty – a fixed value e.g. €100 per tonne of a product
3. A variable duty – a minimum import price (MIP). Importers in the EU do not pay an anti-dumping duty if the
   foreign exporter’s export price to the EU is higher than the MIP. The lesser-duty rule is that duties can’t exceed
   the level needed to repair the harm done to European industry by the unfair dumping practices – currently
   between 9-13% for a range of steel products imported into the EU from China

Question 6

What are types of trade restriction?

Answer 6

Question 7

What is an import tariff?

Answer 7

A tax on imports that may be ad valorem (%) or a specific tax (a set amount per unit imported). Import tariffs also generate tax revenues for the government and may – over time – lead to an improvement in a
nation’s trade balance.

Question 8

What are the impacts of an import tariff on these things? Explain why

Answer 8

Question 9

Show a diagram before a tariff is applied to imported steel

Answer 9

Question 10

Show a diagram after a tariff is applied to imported steel

Answer 10

Question 11

Show a diagram showing the tariff tax revenue for the government

Answer 11

Question 12

Explain what an import quota is?

Answer 12

• A quota is a limit on the total quantity of a product can be supplied to a market.
• An import quota therefore restricts supply of an imported product
• By cutting market supply, the price of the imported product is likely to rise
• Black markets may develop with agents trading at unofficial prices

Question 13

Draw a table showing the impact of an import quota

Answer 13

Question 14

Draw a table showing the impact of an import quota on different stakeholders

Answer 14

Question 15

What are domestic subsidies?

Answer 15

• A domestic subsidy is any form of government financial help to domestic businesses
• The subsidy helps firms to lower their costs and thus become more competitive in home and overseas markets
• Export subsidies are financial incentives to sell products in overseas markets at a profit

Question 16

Draw a table showing the impact of domestic subsidies on domestic producers, consumers and the govt.

Answer 16

Question 17

What are the many types of non-tariff barrier?

Answer 17

1. Intellectual property laws e.g. patents and copyright protection
2. Technical barriers to trade including labelling rules and stringent sanitary standards. These rules and regulations increase product compliance costs and act a friction cost for importers
3. Preferential state procurement policies – where government favour local producers when finalizing contractsvfor state spending
4. Domestic subsidies – aid for domestic businesses facing financial problems e.g. subsidies for car
   manufacturers or loss-making airlines.
5. Financial protectionism – e.g. when a government instructs banks to give priority when making loans to
   domestic businesses
6. Murky or hidden protectionism - e.g. state measures that indirectly discriminate against foreign workers,
   investors and traders.
7. Managed exchange rates – government intervention in currency markets to affect relative prices of imports and exports

Question 18

What is the conventional view of import tariffs?

Answer 18

The conventional view is that import tariffs nearly always lead to a deadweight loss of economic welfare mainly through
the effects of higher prices for consumers and also the distorting effects of a tariff on market competition, prices and
the allocation of scarce resources.

Question 19

What are drawbacks of protectionism?

Answer 19

1. Resource misallocation – leading to a loss of economic efficiency
2. Dangers of retaliation – and risks of a persistent trade war as countries engage in tit for tat responses
3. Potential for more corruption - tariffs are higher in less democratic countries, revenues can be appropriated
4. Higher prices for domestic consumers – this have a regressive impact on poorer people / communities
5. Increased input costs for home producers – this damages competitiveness for businesses that require key
   imported component parts and raw materials that are subject to an import tariff or stringent quota
6. Barrier to entry – protectionism reduces market contestability and thereby increases monopoly power

Question 20

Draw a diagram showing a tariffs effect on consumer and producer surplus

Answer 20

Question 21

What is an im