• 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