Edexcel A Level Economics A:复习笔记4.1.6 Restrictions on Free Trade

• Free trade aims to maximise global output based on the principle of comparative advantage
• However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
• This is called protectionism & may take the form of limiting imports, limiting exports, boosting exports - or putting administrative barriers in place

Reasons for Protectionism

• The most commonly used forms of trade protectionism include tariffs, subsidies, quotas & administrative barriers

Tariffs

• A tariff is a tax on imported goods/services (customs duty)
• Domestic producers/retailers have to pay the tariff when the good/service crosses the border into the country
  • This raises the cost of production for domestic firms
  • Firms often pass on the increased costs to consumers in the form of higher prices
  • These higher prices allow some domestic firms to increase their output (law of supply)
• More inefficient domestic firms are now producing at the expense of more efficient firms globally who reduce their output due to the tariff
  • With increased domestic output, employment may increase

A tariff raises the price of the world supply from Pw to Pw + tariff. This reduces the quantity of imports from Q1Q2 to Q3Q4

Diagram Analysis

• World supply (Ws) is considered to be infinite & this supply curve is added to the domestic demand (DD) & supply (SD) curves
• The pre-tariff market equilibrium is seen at PwQ2
  • Domestic firms supply up to Q1 at a price of Pw
  • Foreign firms supply the difference equal to Q1Q2 at a price of Pw (imports)
• After the tariff is imposed, the world price increases from Pw to Pw+ tariff
• The new market equilibrium is seen at Pw+tariffQ4
  • Following the law of demand, the quantity demanded contracts from Q2 to Q4
  • Following the law of supply, the quantity supplied by domestic firms extends from Q1 to Q3
  • The level of imports is reduced from Q1Q2 to Q3Q4

Quotas

• A quota is a physical limit on imports e.g. in June 2022 the UK extended their quota on steel imports for a further two years in order to protect employment in the domestic steel industry
• This limit is usually set below the free market level of imports
  • As cheaper imports are limited, a quota raises the market price
  • As cheaper imports are limited a quota may create shortages
• Some domestic firms benefit as they are able to supply more due to the lower level of imports
  • This may increase the level of employment for domestic firms

Subsidies to domestic producers

• A subsidy lowers the cost of production for domestic firms
  • They can increase output & lower prices
  • With lower prices their goods/services are more competitive internationally
  • The level of exports increases
  • The increased output may result in increased domestic employment

Non-tariff barriers

• There are many strategies that can be used to create barriers to trade using less obvious methods than tariffs, quotas & subsidies
  • Health & safety regulations e.g. in 2017 the EU put a new health regulation in place regarding the permitted level of aflotoxins in nuts. Aflotoxin levels are naturally higher in southern hemisphere countries & it effectively blocked the import of southern hemisphere nuts
  • Product specifications e.g. Canada specified that all jam imported into Canada needed to be in a certain size of jar. Many countries do not usually manufacture jars in the required size
  • Environmental regulations e.g. in November 2021 new regulations were put in place in the EU & the USA to limit the amount of imports of 'dirty steel' - predominantly this is steel produced using coal fired power stations which are prevalent in China
  • Product labelling can be expensive for firms to apply & may limit their desire to sell into certain markets

• Protectionist policies have a range of impacts on consumers, producers, governments, living standards, & equality

Tariffs

• The best way to consider the impact of a tariff on stakeholders is to explain it using a diagram

A tariff impacts domestic producers, consumers, foreign producers & the government

Domestic producers

• Before the tariff domestic producers produced output equal to 0Q1 & their revenue was equal to Pw X Q1
• After the tariff was imposed domestic producers produced 0Q3 & their revenue was equal to Pw X Q3
• Domestic producer surplus has increased by area 1 & 2

Domestic consumers

• Before the tariff domestic consumers consumed Q2 products at a price of Pw
• After the tariff domestic consumers consumed fewer products (Q4) at a higher price of Pw+tariff
• Domestic consumer surplus has decreased by areas 1, 2, 3 & 4

Government

• After the tariff is imposed the government receives tax revenue equal to ((Pw+tariff) - Pw) x (Q4-Q3)

Standards of living

• The standards of living for consumers worsen as the value of their income is eroded as they are paying higher prices
• Domestic firms who benefit from increased production may increase employees' wages
  • This would increase the standard of living for employees

Equality

• Workers in industries that have been experiencing structural unemployment due to foreign competition will feel that the tariff results in them being treated more fairly

The Impact of Quotas, Subsidies & Non-tariff Barriers on Stakeholders