Theme 4 - Trade and protectionism Flashcards

Question

advantages of WTO

Answer 1

Promotes Free Trade WTO facilitates trade negotiations and encourages liberalization. This reduces trade barriers such as tariffs and quotas. More open trade increases the flow of goods and services. This helps lower costs for consumers and promotes economic growth. Dispute Settlement Mechanism WTO provides a legal and institutional framework to resolve disputes. Countries can file complaints if they feel their trade rights are violated. This promotes fairness and ensures trade rules are followed. Helps prevent trade wars, as nations have a structured way to resolve conflicts. Stabilizes the Global Economy WTO works to ensure that global trade flows are stable and predictable. Through negotiations, it helps countries commit to reducing trade barriers. This encourages businesses to plan long-term investments. Stability in trade leads to increased confidence in global markets. Encourages Economic Growth WTO’s trade agreements create opportunities for businesses to expand into new markets. By lowering trade barriers, businesses can access cheaper raw materials. Increased market access stimulates innovation and competition. This contributes to overall economic development and higher living standards.

Answer 2

1. favours wealthy nations Developed countries often have more negotiating power and resources to influence trade rules. This results in agreements favouring their own industries, like protecting agriculture in the EU/US. Developing nations’ exports (e.g. agriculture, textiles) face barriers that aren't fully addressed. As a result, these poorer countries are trapped in low-value trade, limiting their growth and development. 2. Limits on Policy Flexibility → Constraints on Industrial Strategy → Harder to Protect Infant Industries → Slower Development WTO rules discourage protectionist measures like tariffs and subsidies. This prevents governments from shielding new, domestic industries that are not yet competitive. These infant firms struggle to grow under foreign competition. Slow Decision-Making and Consensus Rules: The WTO works on a consensus basis, so all 160+ members must agree. This makes it extremely slow to adapt, especially on climate, digital trade, or new forms of protectionism. Countries often bypass the WTO with regional trade agreements (like CPTPP, AfCFTA). This undermines the global rules-based system and weakens the WTO’s role.

Answer 3

- countries specialise in the goods in which they have comparative advantage(lower opportunity costs) - through trade, each country can now consume more in total as they focus on what they can produce more efficiently - countries would then be consuming/producing more so this means an increase in GDP

Answer 4

1. import licensing Governments may require import licenses for specific goods. By limiting how many firms can get a license, supply of imports falls. This reduces market competition, allowing domestic producers to charge more. Consumers face higher prices and less choice. - may benefit local businesses , but can increase costs for importers, leading to inefficiences in the supply chain and higher prices in the long run 2.standards and regulations Countries set strict product standards (e.g. safety, packaging, environmental). Foreign exporters must adapt products to meet rules, increasing production costs. This reduces price competitiveness of imports. Domestic firms face less competition, which may protect jobs or infant industries. 3. local content requirements - local content requirements state that a certain percentage of a product must be produced domestically - this encourages companies to source materials and labour from within a country, thereby supporting local industries - this can strengthen the domestic economy but also lead to higher production costs and limited availability of certain goods if businesses struggle to find suitable local suppliers 4. Red tape: Excessive paperwork, inspections, and customs delays act as hidden barriers. Exporters face uncertainty, delays, and added costs. This makes them less likely to enter the market. Domestic firms stay protected from foreign competition, reducing innovation. quota A quota caps how much of a good can be imported annually. This creates shortages compared to a free market. Prices rise, hurting consumer surplus. Domestic firms may gain market share, but at the cost of inefficiency.

Answer 5

🛡️ 1. Protects Domestic Industries → Reduces Import Competition → Safeguards Jobs → Encourages Industrial Development Tariffs make imports more expensive compared to local goods. This reduces competition from cheaper foreign products. Domestic firms see higher demand, helping them retain or create jobs. Over time, this can support the growth of strategic or infant industries. 📈 2. Improves Balance of Payments → Reduces Imports → Less Outflow of Currency → Narrows Current Account Deficit Tariffs discourage import spending by raising prices. This leads to a reduction in the volume of imports. With fewer imports, the current account deficit may shrink. This can help stabilise the exchange rate and ease external pressures. 💰 3. Generates Government Revenue → Funds Public Spending → Supports Infrastructure or Welfare → Positive Multiplier Effect Tariffs are a source of tax revenue, especially in developing countries. Governments can use the funds for health, education, and roads. This creates jobs and raises living standards in the long term. The multiplier effect boosts national income and growth. 🔄 4. Encourages Local Sourcing → Reduces Foreign Dependency → Improves Economic Resilience → National Security Strengthened By making imports expensive, tariffs incentivise domestic sourcing of inputs. This lowers reliance on global supply chains, especially for key goods (like food or tech). During global shocks (e.g. pandemics), self-reliance becomes crucial. This improves economic security and national resilience.

Answer 6

🛡️ 1. Protects Domestic Industries → Restricts Foreign Supply → Increases Demand for Local Goods → Supports Employment and Output Quotas limit the quantity of imported goods allowed into the country. This reduces the competitive pressure from foreign producers. As imports become less available, consumers shift to domestically produced substitutes. This helps local industries to survive, expand, and retain jobs. 💼 2. Supports Infant Industries → Reduces Exposure to Efficient Foreign Firms → Allows Time to Grow Economies of Scale → Long-Term Global Competitiveness New or small industries may struggle against large foreign firms. Quotas shield them from intense competition in early stages. This gives them time to build capacity, invest, and improve productivity. Eventually, they may become strong enough to compete internationally. 💰 3. Improves Balance of Payments → Reduces Volume of Imports → Lowers Outflow of Currency → Supports Exchange Rate Stability With strict limits on imports, less foreign currency is spent on external goods. This improves the current account balance. A lower demand for foreign currency can help stabilise the exchange rate. This helps reduce the volatility in imported inflation. ⚙️ 4. Encourages Local Production → Stimulates Domestic Investment → Enhances Industrial Capacity → Multiplier Effect on Growth Quotas create a captive market for domestic firms. This encourages firms to invest and expand output to meet demand. Higher investment increases capital stock and productivity. This can lead to a multiplier effect, boosting GDP and employment.

Answer 7

💸 1. Higher Prices for Consumers → Restricted Supply → Reduced Competition → Market Power for Domestic Firms Quotas limit the quantity of cheaper foreign goods, reducing total market supply. With less competition, domestic firms face less pressure to lower prices. This can lead to higher prices for consumers and reduced consumer surplus. In the long run, this could reduce consumer welfare and choice. 🔧 2. Reduced Incentive for Efficiency → Protection from Foreign Competition → Less Need to Innovate → Dynamic Inefficiency Domestic producers face less competitive pressure due to restricted imports. This reduces their motivation to cut costs, improve quality, or innovate. Over time, this leads to X-inefficiency and a slower rate of productivity growth. This could harm their global competitiveness in the long run. 🌍 3. Risk of Retaliation → Other Countries Impose Quotas or Tariffs in Response → Trade War Potential → Lower Global Trade Imposing quotas can be seen as protectionist and may breach WTO rules. Trading partners may retaliate with their own trade barriers. This can lead to a spiral of trade restrictions, hurting exporters. Global trade volume falls, which may negatively impact growth and cooperation. 📉 4. Resource Misallocation → Domestic Firms Protected from Global Prices → Focus Shifts Away from Comparative Advantage → Loss in Global Efficiency By distorting market signals, quotas keep inefficient firms in business. Resources (labour and capital) are used in protected sectors rather than globally competitive ones. This undermines the principle of comparative advantage. The result is lower total output and productivity in the economy.

Answer 8

🌍 1. Increased Trade Between Members → Reduced Tariffs → Lower Costs → Higher Output and Efficiency RTAs eliminate or reduce tariffs and quotas among member countries. This encourages intra-regional trade as goods become cheaper to import/export. Firms benefit from lower input costs, boosting production and reducing prices. This increases economic efficiency, output, and consumer welfare. 📈 2. Economies of Scale → Larger Market Access → Incentive to Expand Production → Lower Average Costs Access to a wider market allows firms to sell to more consumers. This leads to higher production volumes, enabling economies of scale. Average costs fall, making firms more competitive globally. Profits may rise and can be reinvested in innovation or capital improvements. 🏗️ 3. Attraction of Foreign Direct Investment (FDI) → Predictable Trade Environment → Lower Barriers → Higher Investment Inflows RTAs create a stable and predictable trading environment. This encourages multinational firms to invest in the region to access the unified market. FDI brings in capital, jobs, and technology transfer. These boost development and competitiveness in less-developed member states. 🤝 4. Stronger Political and Economic Ties → More Cooperation → Greater Regional Stability → Better Policy Coordination Economic integration fosters trust and collaboration between member nations. Governments are more likely to coordinate on economic, social, and even political issues. This improves regional stability and resilience in times of global shocks. It can also help create common policies on climate, labour, or technology. 📚 5. Trade Creation > Trade Diversion → Replace High-Cost Domestic Output with Lower-Cost Imports → Boosts Efficiency RTAs enable countries to import goods from more efficient regional partners. This replaces high-cost domestic production, increasing allocative efficiency. It also increases competition among firms within the region. Consumers benefit from better prices, variety, and innovation.

Answer 9

🧭 1. Trade Diversion → Less Efficient Global Producers Excluded → Higher Costs for Consumers → Misallocation of Resources RTAs may encourage trade within the region but reduce trade with more efficient non-member countries. This leads to trade diversion, where cheaper goods from outside the bloc are replaced by more expensive regional ones. Consumers may face higher prices and less choice. This results in a misallocation of resources and loss of global efficiency. 🧱 2. Complexity from Overlapping Agreements → "Spaghetti Bowl Effect" → Increased Compliance Costs → Reduced Business Efficiency Many countries are part of multiple overlapping RTAs, each with its own rules of origin and standards. This creates a "spaghetti bowl" of trade rules, increasing bureaucracy and paperwork. Smaller firms especially may struggle with administrative costs and compliance burdens. This complexity can discourage trade rather than encourage it. 💬 3. Unequal Gains Among Members → Large Countries Dominate → Smaller Countries Lose Bargaining Power → Regional Inequality Rises RTAs often benefit larger or more developed economies more than smaller ones. Bigger countries may dominate trade negotiations and influence policies. Smaller members may become economically dependent or have weaker industries undermined. This can widen inequality within the region and create political tensions. 📉 4. Reduced Incentive for Multilateralism → Undermines WTO System → Fragmented Trade Rules Globally → Global Cooperation Declines Countries may focus more on regional deals rather than global multilateral agreements. This weakens the role of the World Trade Organization (WTO) in overseeing global trade. It can lead to a fragmented trade system with conflicting standards and practices. This makes coordinated global responses to crises (e.g., pandemics, climate) more difficult. 🛑 5. Risk of Protectionism Within the Bloc → Non-Members Face Barriers → Retaliation or Trade Wars → Global Instability RTAs can create a “club mentality”, where members trade freely but impose barriers on outsiders. This can distort global competition and provoke retaliatory trade measures from excluded countries. Over time, it risks triggering trade disputes or regional tensions. This undermines the benefits of free trade on a global scale.

Answer 10

🌍 Undermining the WTO’s Most-Favoured Nation (MFN) Principle RTAs give preferential treatment to member countries through lower tariffs or fewer trade barriers ➡️ This violates the WTO’s MFN rule, which requires countries to treat all WTO members equally ➡️ Non-members may face discrimination, reducing the effectiveness of the WTO’s goal of global non-discriminatory trade ➡️ This could fragment global trade and reduce trust in multilateral agreements 🔄 Trade Diversion Instead of Trade Creation RTAs may cause trade to shift from efficient global producers to less efficient regional partners ➡️ This is known as trade diversion, where trade flows are based on RTA membership, not efficiency ➡️ This reduces global allocative efficiency and conflicts with the WTO’s aim of free and fair global competition ➡️ Long term, it could lead to higher global prices and inefficient resource use 📊 Conflicting Rules of Origin RTAs have their own rules of origin, defining what qualifies as a product from a member country ➡️ These rules can be complex and inconsistent across agreements ➡️ This creates administrative burdens and confusion for global firms trying to navigate multiple overlapping RTAs ➡️ It weakens WTO efforts to simplify and unify global trade rules 🧩 Fragmentation of Global Trade System An increase in RTAs leads to a “spaghetti bowl” effect (many overlapping, inconsistent trade rules) ➡️ This undermines the coherence and universality of the WTO framework ➡️ Small or developing nations may be left out of important RTAs, weakening their global competitiveness ➡️ It may reduce the relevance and authority of the WTO in managing trade disputes ⚖️ Weakening the WTO’s Dispute Settlement Role RTA members may prefer to resolve disputes within the RTA framework ➡️ This bypasses the WTO's dispute resolution mechanism, reducing its global influence ➡️ It can lead to inconsistent enforcement of trade rules and weaken global trust in the WTO system ➡️ WTO’s ability to act as a central authority for trade fairness is reduced

Answer 11

🛒 Impact on Consumers Higher Prices: Protectionist policies like tariffs and quotas make imported goods more expensive. Less Variety: Reduced competition means fewer choices of goods for consumers. Decreased Purchasing Power: Higher prices for both domestic and imported goods lead to lower real income. Reduced Consumer Welfare: Consumers are forced to pay higher prices for lower-quality products, reducing overall welfare. 🏭 Impact on Producers Increased Market Share: Domestic producers benefit from reduced competition as imports become more expensive. Higher Profits: With reduced competition, domestic firms can charge higher prices, leading to greater profitability. Less Incentive to Innovate: Protectionism may reduce the need for firms to innovate or improve efficiency as they face less competition. Global Market Vulnerability: Dependence on domestic market protection makes producers vulnerable when global trade barriers are reduced or removed. 💼 Impact on Governments Increased Revenue: Tariffs and import taxes increase government revenue, helping fund public spending. Political Support: Protectionist policies may gain support from domestic industries that benefit from reduced foreign competition. Potential Retaliation: Other countries might retaliate with their own tariffs or restrictions, leading to trade wars. Distortion of Market Signals: Governments may distort resource allocation by supporting inefficient industries, leading to economic inefficiency. 📉 Impact on Living Standards Lower Living Standards: Higher prices for goods and reduced competition reduce consumers’ overall welfare. Reduced Economic Growth: Protectionist policies can lead to less efficient allocation of resources, resulting in lower overall economic growth. Lower Innovation: With fewer global competitors, domestic firms may invest less in research and development, reducing overall technological progress. Increased Costs for Producers: Higher costs for raw materials and inputs due to tariffs on imports may lead to higher prices for domestic goods. ⚖️ Impact on Equality Regressive Effects: Protectionist measures like tariffs tend to disproportionately affect low-income consumers, who spend a larger portion of their income on goods. Higher Income Inequality: The protection of certain industries may lead to higher wages for certain sectors while other sectors face higher costs and stagnation, exacerbating income inequality. Job Losses in Export Sectors: While some sectors benefit from protectionism, export-driven sectors may suffer due to retaliatory tariffs, resulting in job losses in those industries. Wealth Transfer: The benefits of protectionism are often skewed toward large domestic producers or import-competing industries, potentially increasing wealth inequality.

Answer 12

🛒 Increased Prices for Consumers It depends on the size of the tariff → A higher tariff on imports leads to higher prices for imported goods → Consumers are forced to pay more for these goods, which reduces their purchasing power → If the tariff significantly raises prices, consumers may cut back on consumption or switch to lower-quality alternatives, harming welfare. 💰 Higher Costs for Producers It depends on the domestic industry's reliance on imports → If domestic producers rely on imported materials or intermediate goods, a tariff increases their production costs → Higher costs for producers could lead to higher prices for domestically produced goods, reducing competitiveness → In the worst case, it could also force some firms to reduce production or shut down, leading to job losses. 🏭 Reduced Efficiency and Specialization It depends on the extent of protectionism → Tariffs protect domestic industries from foreign competition, which can reduce their incentive to innovate or improve efficiency → In the long run, industries may become less competitive due to a lack of pressure to reduce costs or improve quality → As resources are diverted to less efficient industries, the economy becomes less productive overall. 🌍 Negative Impact on Global Trade It depends on how other countries respond → If other countries retaliate by imposing their own tariffs, global trade can be harmed → Retaliation leads to a trade war, which can disrupt supply chains, reduce market access for exporters, and harm both consumers and producers in the long term → A decline in trade volume reduces overall economic welfare and may create uncertainty in the market. 🏛 Government Revenue It depends on the level of imports → While tariffs generate government revenue, this is a short-term gain → Over time, as consumers and producers adjust to higher prices, the volume of imports may decrease, reducing the revenue generated → The loss of consumer and producer surplus may outweigh the benefits from the tariff revenue, leading to an overall welfare loss. ⚖️ Evaluation Points: It Depends On... ⚖️ Market Elasticities It depends on the price elasticity of demand and supply for the affected goods → If demand for the good is price inelastic, consumers will continue purchasing despite higher prices, and the harm to them will be less → If the domestic industry can easily switch to other suppliers, the harm to producers will be less → In contrast, if demand or supply is highly elastic, the negative effects on consumers and producers are likely to be more pronounced. 🔄 Size and Scope of the Tariff It depends on the size and scope of the tariff → A small, targeted tariff may have less impact on consumers and producers than a broad, high tariff → Larger tariffs are more likely to disrupt trade flows, raise prices significantly, and create inefficiencies in the domestic economy. 🏗 Domestic Industry Competitiveness It depends on how competitive the domestic industries are → If domestic producers are already highly competitive and can innovate, they may benefit from reduced competition → However, if domestic firms are inefficient, a tariff may only delay their need to improve, leading to long-term harm to the economy. 🌍 Global Economic Conditions It depends on the overall state of the global economy → In a period of economic growth, the negative effects of tariffs on global trade may be less severe → In contrast, during a recession, tariffs can exacerbate the slowdown, leading to deeper losses for both consumers and producers.

Answer 13

a tariff rate applied uniformly by a customs union or common market to imports from countries outside the union eg The EU Common Customs Tariff (CCT)

Answer 14

🔹 1. Reduces Efficiency and Innovation ⚙️ Tariffs and quotas shield domestic firms from foreign competition → Less incentive to innovate, cut costs, or improve quality → Leads to productive and allocative inefficiency in the long run → Slows down technological progress, which limits long-term development 🔹 2. Higher Prices for Consumers 🛒 Import restrictions make foreign goods more expensive or unavailable → Domestic firms may charge higher prices without competition → Reduces consumer welfare and real incomes → This lowers standards of living and slows human development 🔹 3. Retaliation and Loss of Export Markets Trade partners may impose counter-tariffs in response → Reduces demand for domestic exports → Slows GDP growth and may worsen current account deficits → Hurts sectors that rely on international trade, limiting growth opportunities 🔹 4. Resource Misallocation Protectionism encourages production in less efficient industries → Diverts resources from high-productivity or comparative advantage sectors → Slows structural transformation and diversification → Limits long-term gains from trade and reduces economic dynamism 🔹 5. Reduces FDI Inflows 💸 Foreign firms may avoid investing in countries with high trade barriers → Missed opportunities for technology transfer, jobs, and skills development → Limits capacity building and industrial upgrading → Slows down capital formation needed for sustainable development 🔹 6. Disproportionate Impact on Low-Income Households (regressive) Tariffs raise the prices of imported goods like clothing, food, and tech → These essentials make up a larger share of spending for poorer households → Real incomes fall and purchasing power declines → Increases inequality and reduces access to basic goods and services 🔹 7. Reduces Access to Key Services and Inputs Protectionist policies can restrict imports of healthcare equipment, educational tools or tech → Poorer regions become less able to access quality public goods → Hurts human capital development, particularly for low-income groups → Slows long-term social mobility and development outcomes

Theme 4 - Trade and protectionism Flashcards

(38 cards)