4.1.6 restrictions on free trade

losers of protectionism

- Domestic consumers pay higher prices for inferior products. Some imported products might not be available to buy at all - More efficient producers located abroad

winners of protectionism

- Employees working in uncompetitive businesses that would otherwise lose their jobs - Shareholders who receive inflated dividend incomes on the additional profits generated by blocking out imported competition - The state that receives tax revenues from firms that would otherwise go out of business. The state also benefits from reduced unemployment and a better current account balance

cons of protectionism

- Higher prices for consumers (tariffs, quotas reduce supply) - Reduced efficiency- reduced competition. If uk firms face less of a competitive threat they could become complacent and inefficient. Firms will only strive to become more efficient if their survival is threatened. Over time leads to higher prices, slower rates of innovation, inhibits creative destruction - Retaliation- countries affected by tariffs and quotas might impose them back. Uk export income would be likely to fall. Ad falls.

non-tariff barriers/hidden barriers to trade

- Manipulation indirect taxation rates. High indirect tax rates on imported products diverts demand away from them to domestically produced alternatives. - Some governments prevent the freedom of movement of people within a customs union by refusing to recognise the professional qualifications of immigrants. To stop foreigners taking jobs of locals. - Delays and bureaucracy at border controls - disincentive for foreign firms that want to sell their goods in another country's market - Legal barriers- some countries change product regulations and safety standards on a regular basis in order to block foreign imports - Public sector procurement policies that benefit domestic suppliers. e.g. Italian government only bough itliaan cars for its police force. - Public information campaigns- encourage consumers to buy domestically produced goods. Encourage economic nationalism.

benefits of protectionism

- Security and self-sufficiency - do not rely on foreign imports as a source of domestic supply. - Prevent structural unemployment- reduces the demand for imports and diverts it to domestically produced goods. Jobs saved. yay. what use are cheap imports without jobs. Debt-fuelled consumption is not sustainable because the amount owed willl steadily grow relative to the borrower's income, making default inevitable - Protectionism prevents a destructive race to the bottom- in order to compete in a globalised free market, firms will have to cut prices. In order to do this, firms must cut their costs in order to save their profit margins. Costs could be cut by social and environmental dumping i.e. by cutting the stand or environmental or social protection. Trade off between material and non-material standard of living. - Infant industry argument- inchoate industries may lack the economies of scale LOOK UP needed to survive in a free trading environment where they might be up against long established foreign competitors that are able to operate at a low average cost because they are larger. Once the minimum efficient scale has been achieved, protectionist trade barriers protecting the infant industry can be removed - The sunset industry argumetn- a sunset industry is an industry that is in decline. This industry could well be concentrated within a specific geographical region within the country. If the industry is not protected the decline could cause negative multiplier effects within the region. - dumping - it is fair to retaliate against a country that is using dumping by imposing protectionist trade barriers against them. Dumping makes a country dependent on imports.

what is a tariff

A tariff is an indirect tax which is levied on imported goods. The effectiveness of a tariff depends on the PED of the import in question. see tariff diagrams

how does dumping work

Uk government pays subsidies to uk farmers -> uk farmers costs down -> uk farm profit margins rise -> uk farm supply increases -> uk farm prices fall -> uk food surpluses exported at artificially low prices -> African farmers undercut -> African farmers lose market share -> decrease in profit for African farmers -> African farmers forced out of business -> africa now dependent on food imports -> uk farmers raise prices in africa to exploit the low led created by dumping. Dumping is an international version of predatory pricing

what is a quota

a quota is a physical limit on the volume of imported goods that are allowed into a country. quotas reduce the demand for imports by reducing consumer choice. once the quota has been filled consumers have no choice but to buy domestically produced substitutes for the imported that they might have preferred to buy. quotas stop structural unemployment from rising in places like Italy by limiting the availability of cheaper and/or better quality chinses clothes in Europe. quotas give an unfair advantage to less efficient European producers of clothes, who get to keep a greater share of the European market than they really deserve. an embargo is a zero quota i.e. a complete ban

what is a subsidy

a subsidy is a sum of money given to the producer, usually on a per unit basis, by the government. subsidies help to reduce a firm's costs, enabling the firm receiving the subsidy to cut its market price without cutting Ito its profit margins. some countries use subsidies to give domestic firms an unfair cost advantage over foreign firms that do not receive th same subsidies from their govenments. export subsidies are designed to help uk firms sell more exports. export subsidies are controversial. Countries that use export subsidies to give their firms a competitive edge in their export markets are often accused of using a tactic called 'dumping'. Dumping occurs when subsidised goods are sold off at a price that is below the cost of production in a foreign market. Dumping undermines domestic producers who cannot compete with the artificially cheap subsidied exported goods. It could be argued that dumping is anti-competitive. Once domestic firms have been forced out of their market the country will then become dependent upon imports. Happens with the eu's common agricultural policy - over 40% of the eu budget is spent on subsidies

what is protectionism

protectionsim describes a situation in which government policies which are designed to push a country's current account deficit towards a surplus by boosting the country's export income or reducing the country's import expenditure are implemented.