Restrictions on free trade

• Reasons for restricting free trade include : protecting infant and developing industries and their employment, preventing dumping, correcting BoP imbalances, retaliating against restrictions imposed by others
• With countries wanting to protect infant and developing industries and their employment, they also aim to maximise global output based on comparative advantage
• Countries want to prevent imports exceeding exports so restrictions can help to prevent balance of payment imbalances
• A tariff is a tax on imported goods, making them more expensive.

  Consumer surplus will fall and producer surplus will rise

  Governments will receive new revenue and imports will also fall

  Domestic demand for imports will contract but domestic supply will extend as firms can operate better with less international competition

  There will be a dead weight loss of consumer surplus and of world efficiency
• The effect of tariffs will however depend on PED. Inelastic goods like oil will still be imported on a high scale. Governments can still increase revenue and but domestic firms' ability to compete may be affected
• Tariffs may reduce unemployment levels as domestic firms can increase output better allowing them to compete better meaning they can increase workers' wages, raising living standards.
• Tariffs may however bring trade diversion. Higher import prices can cause domestic firms to shift production to a higher cost producer
• Quotas are a physical limit on the quantity of a certain good that can be imported. Hence, domestic firms can increase output and revenue but consumers experience higher prices, less choice and a fall in living standards. But higher business profit may increase (corporation) tax revenue for governments
• Domestic subsides provide domestic producers with lower production costs and prices, helping them to compete on international markets.

  Firms with lower costs can charge lower prices, increasing export levels and so employment as output is higher
• Domestic subsides mean governments can't generate tax revenue and that their national debt is higher. If subsides take a high proportion of government revenue, then consumers may face higher taxes
• Non tariff barriers include health and safety regulations, environment regulations and labeling of products. Foreign firms will have to increase costs to sell into the domestic country so foreign output will fall, limiting competition but also reducing consumer choice
• Restrictions on free trade can cause governments to lose credibility with the WTO. They may also be difficult or expensive for governments to impose