4.1.6 Restrictions on free trade

• What are reasons for trade barriers?

  • To correct a deficit in the trade in good and services balance
  • To prevent dumping
  • To reduce unemployment
  • To reduce the risk of disruption resulting from problems in the global economy
  • To prevent sectoral imbalance
  • To limit the monopoly power of global companies
  • To protect infant industries
• What is dumping?

  When a product sold abroad at below average cost or below the price charged to domestic consumers
• What are characteristics of dumping?

  • Often seen as unfair trade practice because it can harm majestic industries in the importing country by undercutting their prices and potentially driving them out of business
  • Can distort competition and lead to trade tensions between countries
  • Can implement anti-dumping import tariffs
• What are arguments against trade barriers?

  • Risk of retaliation and possible trade wars
  • Higher prices for consumers
  • Regressive effect for income equality
  • Incentives to by-pass controls in shadow markets
  • Resource misallocation
  • Potential for corruption
• What is protectionism?

  Methods of restricting free trade
• What are the types of restrictions on free trade?

  • Tariffs
  • Quotas
  • Subsidies to domestic producers
  • Non-tariff barriers
• What are tariffs?

  Tax on imported goods
• What do tariffs aim to do?

  protect domestic industries from overseas competition
• What are quotas?

  Limits on the quantity of product imported
• What is a subsidy?

  A grant given by the government
• What are non-tariff barriers?

  • Health and safety regulations
  • Environmental regulations
  • Labelling of products
  • Bureaucracy
• What is the impact of protectionist policies on consumers?

  Higher prices and a reduction in consumer surplus and choice
• What is the impact of protectionist policies on producers?

  Domestic firms face less competition and have less incentive to produce at a lower cost
• What is the impact of protectionist policies on governments?

  • Increased tax revenue which could help reduce fiscal deficit
• What is the impact of protectionist policies on living standards?

  • Distorts comparative advantage
  • Specialisation is reduced so there is a lower output
• What is the impact of protectionist policies on equality?

  • Cause an increase in income inequality 
• What is the gravity theory?


  Countries tent to trade most with other nation in closest proximity