4.1.6 Restrictions on Free Trade

• Reasons for Restrictions

  -Infant/ sunset industry argument

  -Overspecialisation

  -National security

  -Terms of trade

  -Job protection

  -Protection from potential dumping

  -Protection from unfair competition
• Terms of Trade


  Increased demand for imports means a nation must export more to afford to import the same amount so protectionism prevents the terms of trade worsening
• Infant/ Sunset Industry Argument


  Industries are protected to allow them to develop a cost advantage via economies of scale so they are more competitive
• Protection Against Dumping


  Dumping undercuts domestic pricing which can kill domestic firms and allows the foreign monopoly to increase prices and exploit consumers
• Job Protection


  Protecting employment by protecting them from competition which can lead to producers going out of business
• Protection from Unfair Competition

  Domestic producers may be unable to compete with firms with fewer labour or health and safety regulations or which are heavily subsidised
• Danger of Overspecialisation


  Protectionism prevents firms and consumers from being reliant on another country for important products/ materials
• National Security


  Protecting the nation from breaches of privacy, intellectual property theft and illicit substances
• Tariffs


  Taxes placed on imported goods thus increasing demand for domestic goods

  
• Benefits of Tariffs

  -Can hypothecate revenue from tariffs to subsidise domestic firms

  -Can reduce the current account deficit

  -Protect domestic industries and jobs
• Limitations of Tariffs

  -Regressive as price increase impacts the poorest

  -Fall in demand for domestic industries due to high prices means unemployment

  -Retaliation means lower demand for UK exports, less corporation tax revenue
• Quotas


  Limits on the level of imports allowed in a country
• Deadweight Loss

  Cost to society created by market inefficiency/disequilibrium due to market distortions eg. tax, tariffs, quotas, min/ max price
• Subsidies to Domestic Products


  Payments to domestic producers which lower their costs to increase their competitiveness can be direct or indirect e.g. tax breaks or cheap loans e.g. the EU's Common Agricultural Policy
• Non-tariff Barriers

  -Embargos

  -Import licensing

  -Legal and technical standards

  -Voluntary export restraint agreements
• Embargo


  A total ban on imported goods
• Import Licensing

  Countries/ firms need a license to import; reducing the number of licenses given restricts the level of imports
• Protectionism


  Guarding a country's industries from foreign competition by imposing restrictions on free trade
• Impacts of Protectionism


  -Loss of allocative efficiency by preventing competition

  -High costs on exporters lower output and damage the economy

  -Tariffs are regressive, but tax revenue can redistribute income

  -Risk of retaliation

  -Government failure

  -Inefficient use of resources