Globalisation & Trade Restrictions
International Trade & Globalisation
Despite the gains from free trade, governments often restrict imports to shelter domestic industries. The main tools are:
- (import duty). A tax added to the price of imported goods. It makes imports dearer, so consumers switch to domestic substitutes, and it raises revenue for the government.
- . A physical limit on the quantity of a good that may be imported in a period. It caps imports directly and gives domestic producers a larger share of the market, but it raises no revenue for the government.
- Subsidy to domestic producers. A government payment that lowers domestic firms' costs, letting them undercut imports. Domestic output rises, but the subsidy is a cost to the government.
- . A complete ban on imports of a good, or on trade with a particular country, usually for political or health reasons.
Common exam question
Naming and choosing a method of protection
Question: Identify two methods of trade protection other than a tariff, or analyse how a government could dismantle protection (2–6 marks).
Asked in 2 of the 11 structured papers. Any relevant method is accepted: import quotas, subsidies, embargoes or bans, licences, and product standards or regulations. The 6-mark version runs the other way: removing tariffs makes imports cheaper; raising quota limits, or scrapping quotas and embargoes, lets more in; ending subsidies means domestic goods are no longer artificially cheap; other countries may then drop their barriers, freeing your exports. Cutting bureaucracy earns credit too.
Set in 4 of the 13 multiple-choice papers. Match the method to the exact aim: a ban is an embargo; a maximum number of imports is a quota; to stop a dumped good, an embargo; to reduce dumped imports, an anti-dumping tariff. A subsidy to home producers does not stop the imports, and changing the exchange rate or interest rates is not a method of protection.
Common exam question
What a tariff or a quota does to the market
Question: Choose the effect of a tariff or an import quota on price, quantity or domestic producers, sometimes as a point on a diagram (1 mark, multiple choice).
Set in 5 of the 13 multiple-choice papers. A tariff is a tax on imports, so it adds to the cost of supplying the imported good: on a diagram that good's supply curve shifts left while demand stays put, so the price rises and the quantity falls. Do not pick the point where demand has shifted too. Dearer imports raise demand for home-produced goods; a tariff does not make home firms more efficient, and it makes neither imports nor home goods cheaper.
A tariff does not fix the quantity imported; a quota does, by capping it. A quota raises no tax revenue, and with fewer imports domestic producers' revenue rises: their output does not fall and the domestic price does not drop. An embargo cuts the trade altogether.
A subsidy to domestic producers shifts supply to the right, from S to S + subsidy, lowering the market price from P1 to P2 and raising quantity from Q1 to Q2. This lets domestic firms undercut imports, but the area A + B (the fall in price to consumers plus the higher price received by producers) is the cost of the subsidy to the government.
