4.2 Types of Trade Protection (DP IB Economics: SL): Flashcards
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- Front4.2.1 Tariffs
Define protectionism.
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Cards in this collection (47)
Define protectionism.
Protectionism is the use of measures such as tariffs, subsidies, quotas or embargoes to limit free trade and protect a country from certain outcomes.
Define tariff.
A tariff is a tax on imported goods and services (a customs duty).
What does free trade aim to maximise?
Free trade aims to maximise global output through national specialisation.
How does a tariff affect the selling price of an imported good within a country?
A tariff raises the selling price of the good or service within the country.
By raising the domestic price, a tariff allows more domestic firms to increase their production and market share.
By raising the domestic price, a tariff allows more inefficient domestic firms to increase their production and market share.
After a tariff is imposed, the level of into the country is reduced.
After a tariff is imposed, the level of imports into the country is reduced.
True or False?
After a tariff is imposed, the quantity supplied by domestic firms contracts.
False.
The quantity supplied by domestic firms extends, while the quantity demanded contracts, following the laws of supply and demand.
How does a tariff affect domestic producers?
Domestic producers gain, as their producer surplus increases by producing more output at a higher price.
How does a tariff affect domestic consumers?
Domestic consumers lose, as they pay a higher price and consume fewer products, so consumer surplus decreases.
How does the government benefit from a tariff?
The government receives tax revenue on the imported goods that are still sold.
True or False?
A tariff always improves total welfare in an economy.
False.
A tariff causes a net welfare loss, as less efficient domestic firms produce at the expense of foreign producers and some consumers are priced out.
How can a tariff harm downstream producers?
Downstream producers who use the imported product as a raw material face higher costs of production, which may reduce their output and employment.
Define quota.
A quota is a physical limit on imports.
Relative to the free market, at what level is an import quota usually set?
An import quota is usually set below the free market level of imports.
How does a quota affect the market price of a good?
By limiting cheaper imports, a quota raises the market price.
Because it limits the supply of cheaper imports, a quota may create in the market.
Because it limits the supply of cheaper imports, a quota may create shortages in the market.
Give a real-world example of a country using an import quota.
In June 2022 the UK extended its quota on steel imports for two years to protect employment in its domestic steel industry.
True or False?
Under a quota, foreign producers receive a lower price per unit than before.
False.
Both domestic and foreign producers receive a higher price (Pq) for each unit sold under the quota; foreign producers simply sell fewer units.
How do domestic producers benefit from an import quota?
With imports limited, domestic firms can supply more, which raises their revenue and may increase employment.
How does a quota affect domestic consumers?
Domestic consumers pay a higher price, which reduces their disposable income, and some are priced out of the market.
True or False?
A government earns tax revenue from a quota, just as it does from a tariff.
False.
Unlike a tariff, a quota does not generate tax revenue for the government.
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.
Global efficiency worsens under a quota because less domestic producers produce at the expense of more efficient foreign producers.
Global efficiency worsens under a quota because less efficient domestic producers produce at the expense of more efficient foreign producers.
How can a quota harm downstream producers?
Downstream producers who use the imported good as a raw material face higher costs of production, which may reduce output and employment.
Define subsidy (as a form of protectionism).
A subsidy lowers the cost of production for domestic firms, allowing them to increase output and lower prices.
How does a subsidy make domestic goods more competitive internationally?
By lowering firms' costs of production, a subsidy lets them charge lower prices, making their goods more competitive internationally.
How does an export subsidy affect the level of imports into a country?
As domestic firms increase output, the level of imports decreases.
By lowering firms' costs of production, a subsidy shifts the domestic supply curve to the .
By lowering firms' costs of production, a subsidy shifts the domestic supply curve to the right.
Give a real-world example of long-running export subsidies.
Since after the Second World War, the European Union has subsidised food production and exports the excess supply this generates.
True or False?
A subsidy shifts the domestic supply curve because it raises firms' costs of production.
False.
A subsidy lowers firms' costs of production, which shifts the domestic supply curve to the right.
How does a subsidy affect domestic producers?
Domestic producers gain, as a subsidy decreases their costs, increases output and revenue, and improves their international competitiveness.
How does an export subsidy affect foreign producers?
Foreign producers find it harder to compete, so their exports and revenue fall.
What is the cost of a subsidy to the government?
A subsidy costs the government the amount of the subsidy, and there is an opportunity cost attached to every subsidy provided.
True or False?
Domestic consumers gain an additional benefit from an export subsidy.
False.
Consumers already benefited from the lower world price, so they receive no further benefit from the subsidy.
A subsidy creates a welfare loss because more domestic producers now produce at the expense of more efficient global producers.
A subsidy creates a welfare loss because more inefficient domestic producers now produce at the expense of more efficient global producers.
Why does the WTO aim to limit export subsidies?
Large, long-running subsidies (such as those in the USA cotton industry) can put small-scale farmers in developing nations out of business, increasing unemployment.
Define administrative barriers to trade.
Administrative barriers are strategies used to create barriers to trade using less obvious methods than tariffs, quotas and subsidies.
Some firms claim they must provide in excess of documents for a single journey across African border crossings.
Some firms claim they must provide in excess of 10,000 documents for a single journey across African border crossings.
How can health and safety regulations act as a barrier to trade?
In 2017 the EU set a permitted level of aflatoxins in nuts, which effectively blocked the import of southern hemisphere nuts.
How can product specifications act as a barrier to trade?
Canada required all imported jam to be in a certain jar size that many countries do not manufacture, restricting imports.
How can environmental regulations act as a barrier to trade?
In November 2021 the EU and USA limited imports of 'dirty steel' (steel produced using coal-fired power, prevalent in China).
How can product labelling act as a barrier to trade?
Product labelling can be expensive for firms to apply, which may limit their desire to sell into certain markets.
How can inefficient administrative systems act as a barrier to trade?
Many African border crossings still require physical paper documents, with some firms claiming they need over 10,000 documents for a single journey.
Aflatoxin levels are naturally higher in hemisphere countries, so the 2017 EU limit blocked their nut imports.
Aflatoxin levels are naturally higher in southern hemisphere countries, so the 2017 EU limit blocked their nut imports.
True or False?
A tariff is an example of an administrative barrier to trade.
False.
Administrative barriers are distinct from tariffs, using less obvious methods such as regulations and product specifications.
True or False?
The EU and USA introduced 'dirty steel' import limits in 2017.
False.
The 'dirty steel' import limits came in November 2021; the 2017 EU measure was the aflatoxin limit on nuts.
Name five types of administrative barrier to trade.
Five types are health and safety regulations, product specifications, environmental regulations, product labelling and inefficient administrative systems.
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