Unit 4: Restrictions on Free Trade Flashcards
What are the Reasons in Favour of Protectionism?
Infant Industry argument
Geriatric/Sunset Industry argument
Ensures employment Protection
Corrects a BoP Deficit on the Current Account
Restricts Imports from countries with less stringent health + safety and environment legislation
Strategic reasons
Raises Tax Revenue
Retaliation
Prevents Dumping
What is the Infant and Geriatric/Sunset Argument?
Industry: Without protection, new small businesses may not be able to compete, as they have yet to establish themselves.
Geriatric: the protection of industries that need time to restructure so they can become competitive again
What is meant by ‘Retaliation’?
Barriers to trade may be imposed by Country X on Country Y, because Country Y has restricted the imports of Country X’s goods
What is meant by ‘‘Dumping’?
This is a type of predatory pricing behaviour, whereby goods are sold for export at less than the average costs of production. It is illegal under WTO rules, and unfair distorts Comparative Advantage
What are the Problems with Protectionism?
- Higher price and less choice for consumers
- Inefficient resource allocation - CA is distorted, leading to lower output + SoL
- Regressive Effect on Income Distribution - he tariffs fall on the products lower income families spend a higher % of their income of
- Product Inefficiencies - firms protected from protection competition have little incentive to reduce production costs
- Trade Wars - one country imposing import controls will lead to retaliatory actions
- Difficult to remove barriers once they’re set up
What are the Methods of Trade Barriers?
Tariffs Quotas Embargoes Rules + Regulations Domestic Subsidies Preferential state Procurement Policies
What are Tariffs?
They are simply taxes on imports
What are Tariffs also known as?
Custom Duties
What are Quotas?
Physical Restrictions on the amount of goods that can be imported
What is meant by Rules + Reguations as a Trade Barrier?
A Complete Ban on the import of a particular good
What is meant by Domestic Subsidies?
Grants given to domestic producers
What is meant by Preferential state Procurement Policies?
Where a government favours local/domestic producers when finalising contracts for state spending
What are the Effects of Tariffs?
Price paid by consumers rises
Imports fall
Domestic output rises
Government tax revenue rises
What does the Tariff diagram look like?
https://11tanihi.files.wordpress.com/2011/01/pic008.gif
the two triangles represent welfare loss
What are the Effects of Quotas?
Price paid by consumers rises Imports fall Domestic output rises Loss of businesses to some importers Revenue to the remaining importers rises (because prices go up)
