4.1.6 - Restrictions on free trade Flashcards
(35 cards)
What is free trade ?
Free trade is international trade without restrictions such as tariffs
- Developed countries
What is protectionism ?
The policy of restricting imports through trade restrictions
- Developing countries
Why do countries use trade restrictions ?
National security
Public safety
Tax revenue
Protect domestic industries
Retaliation
Prevent dumping
Why do countries use trade restrictions ? (National security)
A country may prevent goods and services from entering the country if it believes there is a risk to national security
- Normally in times of war
Why do countries use trade restrictions ? (public safety)
Some goods and services pose a danger to public health.
A country may decide to ban or restrict products as a result.
Why do countries use trade restrictions ? (tax revenue)
Administrating tariffs is far easier than other taxes such as income taxes.
This is especially the case in developing countries because they tend to be agricultural and have large informal sectors.
What will be the effect of decreasing tariffs on a developing country ?
It will have a big impact on government revenues as they are dependent on tariff revenue from developed countries
Why do countries use trade restrictions ? (protecting domestic industries)
A tariff makes imports more expensive.
Products made by domestic firms become more attractive as a result: there is less competition for these firms.
Trade restrictions can therefore act in the interests of domestic firms.
What is an infant industry ?
An industry new to a country, but already established in other countries
What does the infant industry argument say ?
The infant industry argument holds that such industries need protection from competition in their beginning stages.
Therefore, protecting these industries during development is justifiable for proponents of the infant industry argument.
What is a downside of a tariff ?
Higher prices for consumers (ALWAYS)
Reductions in efficiency due to the restriction of competition
Why do countries use trade restrictions ? (retaliation)
- To punish the other country.
- To convince the other country to remove trade restrictions
- To serve as a warning to other countries.
What is dumping ?
This is when an exporter sells below production costs
Why may a firm dump ?
- One reason a firm may do this is excess capacity or a failure to find a buyer.
- To sell this stock firms resort to selling below production costs.
Why may international firms dump abroad ?
- Another reason is that foreign firms may aim to drive out domestic competition.
- By selling at artificially low prices, foreign firms hope to put domestic firms out of business.
- Once the domestic competition has been eliminated foreign firms can dominate the market (and potentially raise prices).
- This will have negative effects for a country’s economy in terms of employment and GDP.
What does the anti dumping argument say ?
If a country suspects that a trading partner is practising dumping, it should have the right to impose tariffs or quotas in order to limit imports of the dumped good.
What is a tariff ?
It is a tax on imports or exports
Mostly on imports and on an ad valorem basis
What is a quota ?
A quota is a limit on the number of imports allowed for a product in a country
They are often
What is the rationale behind quotas ?
The rationale for a quota is to protect domestic firms by restricting imports
Why may a country give subsidies to domestic producers ?
One is to encourage firms to grow in size thereby allowing them to compete on a global scale.
Furthermore, they enable producers to lower production costs thus making their products more competitive (both nationally and internationally).
What is an embargo ?
An official ban on trade or other commercial activity with a particular country
Give an example of a restriction a country can place on the import of international goods
Increase the amount of paperwork required to import a good.
This will increase production costs for importers.
The speed they can deliver goods may also increase if this paperwork leads to delays at customs borders.
What are administrative barriers ?
A procedure or legal requirement that can inhibit trade if set in an arduous manner
e.g. excessive paperwork required to import
What is a detractor ?
A person who disparages someone or something
Disparage: regard or represent as being of little worth.
