4.1.6 - Restrictions on free trade

• Types of restrictions:

  • Tarffis
  • Quotas
  • Subsidies to domestic products
  • Non-tariff barriers
• Reasons for restrictions

  • Infant industry argument
  • Job protection
  • Protection from potential dumping
  • Protection from unfair competition
  • Terms of trade
  • Danger of over specialising
• An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher. Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level.
• Dumping is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries.
• Tariffs are taxes placed on imported goods in an attempt to prevent people from buying them
• Impact of protectionism on consumers:

  • higher prices
  • better quality products due to increased domestic competition
• Tariffs:

  • The tariff diagram illustrates the effects of imposing a tariff. The original quantity of imports is Q2 – Q1, and the new quantity of imports is Q4 – Q3.
  • The purple shaded rectangle shows the revenue the government gains from imposing the tariff. This could help finance government expenditure.
  • The two blue triangles show the area of deadweight loss of welfare, as a result of the tariff

  A) Post tariff

  B) Pre tariff

  C) Q3

  D) Q2

  
• Quotas:

  • Quotas set a limit on the quantity of a specific product that can be imported.
  • They directly control the volume of imports, often to protect domestic producers
• Subsidies to Domestic Producers:

  • Governments provide financial support to domestic industries, reducing production costs.
  • Subsidies make domestic goods more competitive in both domestic and international markets.
• Subsidies diagram

  A) S1

  B) S2

  
• Non-Tariff Barriers:

  • These are various measures other than tariffs that restrict trade.
  • Examples include licensing requirements, technical standards, and health and safety regulations.