Restrictions On Free Trade

Question 1

What is protectionism?

Answer 1

It involves policies to restrict trade

Question 2

What does protectionism involve? (7)

Answer 2

Higher tariffs 
Non- tariff barriers
Embargo
Government subsidy
Distorted exchange rate- dirty floating
Weakened environmental law
Voluntary export restraint

Question 3

Reasons for restricting trade? (5)

Answer 3

1. Infant industry argument
2. The senile industry argument
3. Need to diversify the economy
4. Protection against dumping
5. Environmental

Question 4

How to the infant industry argument have a reason for protectionism?

Answer 4

Developing countries with new industries they would struggle against international competition. Eye need tariff protection whilst developing so they can be more competitive later on.

Question 5

How does the senile industry argument have a reason for restricting trade?

Answer 5

If industries are declining, they may require investment to make them efficient. Protection could act as an incentive for firms to invest.

Question 6

Why does the need to diversify the economy have a reason for restrictions on trade?

Answer 6

Developing countries rely on producing primary products, in which they have a comparative advantage in. However relying on agricultural goods has several disadvantages.

1. Prices can fluctuate due to environmental factors
2. If goods have a low income elasticity of demand. Then if economic growth rises, demand will a little

Question 7

Protection against dumping is a reason to restrict trade how?

Answer 7

The EU sold a lot of its food surplus at very low prices. This caused issues for world farmers, because of a fall in their market price. Tariffs can protect against dumping

Question 8

Why does the environment need restriction on trade.

Answer 8

Free trade can harm the environment. This is because countries with strict pollution controls may find consumers import goods from other countries that allow pollution higher.

Question 9

What is the impact of protectionism policies on consumers? 1+2

Answer 9

Pro- may enable a more diverse and productive economy in the long term which improves e standard of living.

Con- pay a higher price for imported goods, lower standard of living
Con- Poor people lose out for paying more of their income to basic items

Question 10

What are the impacts of protectionism on producers? 1+1

Answer 10

Pro- benefit from selling to the domestic market

Con- export firms with a comparative advantage lose out as countries place tariffs in retaliation

Question 11

Impact of protectionism on the government 1+1

Answer 11

Pro- gain tariff revenue

Con- Not likely to be a significant part of the total tax revenue

Question 12

What is International financial flows?

Answer 12

Official financial flows could take the form of aid or payments to bodies like the EU

Question 13

What is short term capital flows?

Answer 13

Refers to the movement of financial savings one country to another. If interest rates are high in a country it would shift savings ‘hot money flows’

Question 14

What is long term foreign direct investment?

Answer 14

Occurs when a foreign firm invests in another country E.g a factory

Question 15

Benefits of free trade? (6)

Answer 15

1. Reducing tariff barriers leads to trade creation
2. Increased exports
3. Economies of scale
4. Increased competition
5. Trade is an engine of growth
6. Make use of surplus raw materials

Question 16

How does reducing tariff barriers lead to trade creation?

Answer 16

Removal of tariffs leads to a lower price for consumers. This in turn leads to an increase in overall economic welfare.

Question 17

What is trade creation?

Answer 17

Trade creation occurs when consumption switches from high cost producers to low cost producers, enabling an increase in economic welfare.

Question 18

How to free trade increase exports?

Answer 18

If a UK firm have a comparative advantage in something, then with lower tariffs, why can export more and create more jobs

Question 19

How does free trade increase economies of scale?

Answer 19

If a country specialises in a good, they can benefit from economies of scale and lower average costs.

Question 20

How does free trade increase competition?

Answer 20

With more trade, domestic firms will face greater competition from abroad a d have more incentive to cut costs and increase efficiency

Question 21

How is trade an engine of growth?

Answer 21

World trade has increased by an average of 7% a year since 1945 - a big contributor to world economic growth

Question 22

How does free trade make use of surplus in raw materials?

Answer 22

Countries with large reserves of raw materials need to trade to benefit from their natural wealth