4.2 Types of Trade Protection (DP IB Economics: HL): Flashcards
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Define protectionism.
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Define protectionism.
Protectionism is the use of measures such as tariffs, export subsidies, quotas or embargoes to limit free trade and protect the domestic economy.
Define tariff.
A tariff is a tax, or customs duty, on imported goods or services.
What aim of free trade does protectionism work against?
Free trade aims to maximise global output through national specialisation.
A tariff raises the selling price of a good, allowing more domestic firms to increase their production and market share.
A tariff raises the selling price of a good, allowing more inefficient domestic firms to increase their production and market share.
How does a tariff affect more efficient global competitors?
More efficient global competitors reduce their output because of the tariff.
True or False?
Imposing a tariff causes the quantity of imports to rise.
False.
A tariff raises the price of imports, so quantity demanded contracts and domestic supply extends, which reduces the level of imports.
After a tariff is imposed, what happens to domestic quantity supplied and quantity demanded?
Domestic quantity supplied extends and quantity demanded contracts, so the level of imports falls.
How does a tariff affect domestic producers?
Domestic producers increase their output and their producer surplus increases.
After a tariff is imposed, foreign producers sell less output and their producer surplus .
After a tariff is imposed, foreign producers sell less output and their producer surplus decreases.
How does a tariff affect domestic consumers?
Consumers pay a higher price and buy fewer products, so consumer surplus falls and some consumers are priced out of the market.
How does the government benefit from a tariff?
The government receives tax revenue equal to the tariff multiplied by the quantity of imports that remain.
True or False?
A tariff removes any welfare loss for society.
False.
A tariff creates a net welfare loss, as less efficient domestic firms produce at the expense of more efficient foreign producers and some consumers are priced out.
Why can a tariff raise costs for downstream producers?
Producers who use the imported product as a raw material must pay more, increasing their costs of production and possibly reducing output and employment.
Define quota.
A quota is a physical limit on the quantity of imports allowed into a country.
Relative to the free-market level, where is an import quota usually set?
A quota is usually set below the free-market level of imports.
How does a quota affect the market price, and why?
By limiting cheaper imports, a quota raises the market price and may create shortages.
A quota shifts the domestic supply curve to the right by the size of the .
A quota shifts the domestic supply curve to the right by the size of the quota.
True or False?
Under a quota, only foreign producers receive the higher price.
False.
Once the quota is announced the market prices in the reduced supply, so both domestic and foreign producers receive the higher quota price.
What happens to total output when a quota is imposed?
Total output falls, because the quota raises the price and reduces the equilibrium quantity.
Why is a quota often seen as less confrontational than a tariff?
A quota is less confrontational because there is less of a penalty for trading partners than with a tariff.
How does a quota affect domestic producers' revenue?
Domestic producers can supply more at a higher price, so their revenue increases.
How are foreign producers affected by a quota?
Foreign producers receive a higher price per unit but sell fewer products, so their overall revenue falls.
Unlike a tariff, a quota generates no revenue for the government.
Unlike a tariff, a quota generates no tax revenue for the government.
How does a quota affect domestic consumers?
Consumers pay a higher price, which reduces disposable income, and some leave the market because they cannot afford it.
True or False?
A quota improves global efficiency.
False.
Global efficiency worsens, as less efficient domestic producers produce at the expense of more efficient foreign producers.
Define subsidy.
A subsidy is government support that lowers the cost of production for domestic firms, allowing them to increase output and lower prices.
How does a subsidy make domestic firms more competitive internationally?
By lowering costs of production, a subsidy lets firms lower prices, making their goods more competitive internationally.
What happens to imports when a subsidy raises domestic output?
As domestic output rises, the level of imports decreases; if firms meet all domestic demand, the excess supply may instead be exported.
A subsidy lowers firms' costs of production, shifting the domestic supply curve to the .
A subsidy lowers firms' costs of production, shifting the domestic supply curve to the right.
How can an export subsidy affect domestic employment?
The increased output may result in increased domestic employment.
True or False?
A subsidy raises domestic firms' costs of production.
False.
A subsidy lowers domestic firms' costs of production, shifting the domestic supply curve to the right.
Historically, how did EU food subsidies lead to exports?
After the EU subsidised food production following WW2 and achieved food security, countries could export the excess supply the subsidies generated.
How does a subsidy affect domestic producers?
Domestic producers have lower costs, increase output and revenue, and become more internationally competitive.
How are foreign producers affected by a domestic subsidy?
It becomes harder for foreign producers to compete, so their exports and revenue fall.
True or False?
Consumers gain a further benefit when a subsidy is introduced under free trade.
False.
Consumers already benefit from the lower world price and receive no further benefit from the subsidy.
Providing a subsidy costs the government the amount of the subsidy and carries an cost.
Providing a subsidy costs the government the amount of the subsidy and carries an opportunity cost.
Why does a subsidy create a welfare loss for society?
A welfare loss arises because more inefficient domestic producers produce at the expense of more efficient global producers.
Define administrative barriers.
Administrative barriers are strategies that create barriers to trade using less obvious methods than tariffs, quotas and subsidies.
How can health and safety regulations restrict trade?
By setting strict standards that imported goods cannot meet, health and safety regulations can effectively block imports.
How can product specifications restrict imports?
By demanding unusual product specifications that many exporters do not produce, a country can limit imports.
How can environmental regulations act as a trade barrier?
By limiting imports that fail to meet environmental standards, environmental regulations can restrict trade.
How can inefficient administrative systems restrict trade?
By imposing burdensome paperwork at borders, inefficient administrative systems raise costs and delay imports.
Why can product labelling requirements deter exporters?
Applying the required labelling can be expensive for firms, which limits their desire to sell into certain markets.
True or False?
There is only one method of creating administrative barriers to trade.
False.
There are many methods, including health and safety regulations, product specifications, environmental regulations, product labelling and inefficient administrative systems.
In 2017 the EU restricted nut imports via a regulation on a toxin whose levels are naturally higher in southern countries.
In 2017 the EU restricted nut imports via a regulation on a toxin whose levels are naturally higher in southern hemisphere countries.
In 2021, new environmental regulations limited imports of 'dirty ' produced using coal-fired power stations.
In 2021, new environmental regulations limited imports of 'dirty steel' produced using coal-fired power stations.
In 2021, new environmental regulations limited imports of 'dirty ' produced using coal-fired power stations.
Canada required imported jam to be in a specific jar size that many countries do not manufacture, blocking those exporters.
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