|
|
Trade Barriers What are trade barriers? Trade barriers are measures which restrict trade between countries eg tariffs & quotas Why do countries impose trade barriers? Countries seek to protect domestic industries from imports by creating barriers to the free movement of products through: Tariffs an indirect tax on imported products raising the price of imports Quotas physical limits on the volume of imports allowed into a country Government subsidies a payment by the government to domestic producers Tax regime including the tax base – (those items taxed in a country) and tax rates (the amount charged for times) Eg different corporation tax rates affect the location of firms who will locate in low tax areas. Public procurement procedures: central and local government gives contracts only to domestic firms National qualifications Failing to recognise a qualification awarded in another country restricts the mobility of labour The effects of a tariff In a closed economy with no international trade, price is PUK with QUK exchanged. There are no imports In an open economy with no protectionism the country is a price taker for the imported good ie it can import all it likes at price P2. The total sold is Q5 of which: Domestic firms supply Q2 a reduction of (QUK-Q2) Foreign firms supply Q5-Q2 Adding a tariff to the world supply curve raises price to P3. Domestic firms supply Q3 – a reduction of (Q3-Q2) Foreign firms supply (Q4-Q3) – a reduction of (Q5-Q4) Imports fall to Q4-Q3 The government raises additional revenue = (P3-P2) x (Q4-Q3) The effects of a quota In an open economy with no protectionism the country is a price taker for the imported good ie it can import all it likes at price P1. The total sold is Q4 of which: Domestic firms supply Q1 Foreign firms supply Q4-Q1 Introducing a quota increases total domestic supply from S1 to S2. Price rises from P1 to P2. Domestic firms now supply Q2 – an increase of (Q2-Q1) Foreign firms now supply Q3 – a reduction of (Q4-Q3) The effects of subsidy A subsidy (SU) is a payment by the government to domestic producers that enable them to undercut foreign firms. Initially given the world supply curve UK firms produce Q1 at price PW. Imports are (Q2-Q1). The government now introduces a subsidy of SU for domestic producers shown by adding the amount of the subsidy to the supply curve. UK firms now supply Q3. Imports are now (Q2-Q3) a fall of (Q3-Q1) The cost to the government of the subsidy is SU x Q3 – a transfer from tax payers to producers |