Barriers to trade

Introduction

This lesson focuses on the different types of trade protectionism which a government may employ.  The page is effectively decided into two parts, the first looks at justifications for trade protection and the second looks at the different kinds of trade barrier.

Enquiry question

How do different types of trade barrier impact on the market for imported goods and services.  Discuss the arguments in favour of trade protection, as well as the arguments against domestic protection.

Lesson time: 85 minutes

Lesson objectives:

Explain, using a tariff diagram, the effects of imposing trade protectionism (quota, tariff and domestic subsidy) on imported goods on different stakeholders, including domestic producers, foreign producers, consumers and the government.

Calculate from diagrams the effects of imposing trade protectionism (quota, tariff and domestic subsidy) on imported goods on different stakeholders, including domestic producers, foreign producers, consumers and the government. (HL only)

Describe administrative barriers that may be used as a means of protection.

Evaluate the effect of different types of trade protection.

Discuss the arguments in favour of trade protection, as well as the arguments against domestic protection.

Teacher notes:

1. Beginning activity - opening discussion on the costs and benefits of free trade.  Allow 25 minutes for the videos and discussion. 

2. Processes - technical vocabulary - the students can learn the background information from the first video and the list of key terms.  (10 minutes)

3. Link to TOK - are there moral as well as economic arguments in favour of free trade? (10 minutes)

4. Applying the theory - activities 3 - 6 is are paper three in type, graphing and short answer responses.  You could argue that these are suitable for HL only but your SL students will also benefit from the exercises. (30 minutes)

5. Link to the assessment - activity 7 is a paper two type question on protectionism, ideal as a class or homework exercise.  (10 minutes of class time)

Key terms:

Free trade - the free movement of goods and services between different nations, free from government taxes or restrictions on the movement of those good and services.

Protectionism - when restrictions are placed on the free movement of goods and services. 

Tariff - a tax placed on an imported good or service, put in place to protect domestic industries, but also as a method of raising tax revenue. 

Quota -  a limit on the numbers or value of a good or service that a country will allow into the country, either a quota representing the total volume of a specific product that is allowed into the country, or broken down by country.

Domestic subsidy - rather than penalising cheap imported products a domestic subsidy instead provides financial incentives for domestic firms to compete with low priced goods and services produced overseas. 

Red tape / bureaucratic barriers - another option for governments wishing to protect their own domestic firms.  These are sometimes called hidden barriers as officially they do not exist.  Examples of this form of barrier include restricting the import of goods and services on the grounds of national security, health and safety or environmental standards.

  The activities on this page are available as a PDF file at:  Free trade and protectionism

Activity 1: Views of protectionism

Begin the activity by starting with a free vote: 'Would you support your government placing trade barriers on imported goods and services'?

Watch the following video which analyses the merits and weaknesses of free trade.  Afterwards decide for yourselves, is free trade a good idea? You might wish to only watch the first 5 and a half minutes of this video and the second half moves onto to other aspects of trade.

Summarise the reasons why governments may impose trade barriers on imported goods and services.

1. Protecting their own domestic industries from low cost producers

2. Protecting domestic employment or industries

3. Strategic / national security reasons

4. To protect an infant industry

5. To protect dumping

6. On health and safety as well as quality grounds

7. To avoid over specialisation

8. To correct a budget and current account deficit.

However, the following are the objections to the motives of free trade above. 

Concentrating on each individually:

1. Protecting inefficient domestic industries is a poor use of government priorities, with the price paid by domestic consumers.  This also applies to the argument that trade barriers protect domestic employment or industries.

2. To protect an infant industry is an argument but nations have been very slow to remove the barrier once the industry has become established.

3. To protect from unfair competition, is a subjective term - what is fair for one nation or producer may not be fair for another.

4. To correct a budget deficit - while this argument carriers some weight for LEDCs who have limited opportunities to collect tax revenue from other sources.  In developed nations, however, this has limited scope given the small level of government revenue collected from tariffs.

5. To correct a current account deficit - will not work if other nations then impose retaliatory trade barriers in response.

6. Lastly, like any government action creates opportunities for funds to misappropriated.

Activity 2: Theory of knowledge connection

Are there moral as well as economic arguments in favour of free trade?

Activity 3: Tariff barriers

Start with the following short video and then complete the questions that follow:

1. The diagram to the right shows the market for corn in a fully developed nation.

(a) Indicate the following points:

  • the level of domestic supply
  • the quantity of imported corn
  • the equilibrium price.
  • the level of domestic supply (5,000 kgs)
  • the quantity of imported corn (12,000 kgs)
  • the equilibrium price. ($5)

The government decides to place a $2 tariff on the product, shown by the following diagram.

(b) Indicate the following points:

  • the new level of domestic supply
  • the new quantity of imported corn
  • the new equilibrium price
  • the size of the tariff revenue generated
  • the welfare loss resulting from a loss of consumer surplus.
  • the welfare loss resulting from corn now being produced by inefficient domestic producers, rather than more efficient imported producers.
  • domestic supply (8 million kgs)
  • quantity of imported corn (6 million kgs)
  • equilibrium price. ($7)
  • Size of tariff area (b) $ 12 million
  • area (c)
  • area (a).

Activity 4: Quotas

The diagram on the right illustrates the market for corn with no trade protection.

The government decides to place a quota of 5,000 kgs on the market for corn.  This means that only this amount in total can be imported.

(a) Illustrate this on the diagram and indicate the following points:

  • the new level of domestic supply
  • the new quantity of imported corn
  • the new equilibrium price
  • the welfare loss resulting from a loss of consumer surplus
  • the welfare loss resulting from corn now being produced by inefficient domestic producers, rather than more efficient imported producers.
  • the new level of domestic supply (7,000 kgs)
  • the new quantity of imported corn (5,000 kgs)
  • the new equilibrium price ($7)
  • the welfare loss resulting from a loss of consumer surplus (red triangle)
  • the welfare loss resulting from corn now being produced by inefficient domestic producers, rather than more efficient imported producers. (green triangle).

(b) Why might some governments prefer to employ a tariff on imported goods and services rather than a quota system?

Using a tariff the government raises tax revenue.

Activity 5: Domestic subsidy

The diagram to the right illustrates the market for corn.

Following the lobbying of government by domestic farmers the government provides a subsidy to their own corn producers.

(a) Illustrate this on the diagram and indicate the size of the subsidy.

(b) Calculate the cost of the subsidy.

17,000 x $5 = $85,000

(c) Identify the opportunity cost of the subsidy.

The $85,000 will need to be funded out of government taxation, which of course involves an opportunity cost.

Activity 6: Red tape / bureaucratic barriers

This is another option for governments wishing to protect their own domestic firms.  These are sometimes called hidden barriers as officially they do not exist.  However, regulation which requires firms to pass expensive and often time consuming tests before gaining a licence to sell in a nation can also act as a barrier to trade, as they provide domestic firms with a competitive advantage.

The different types of hidden trade barriers include:

  • import licencing requirements
  • minimum import price limits
  • customs and administrative entry procedures
  • documentation requirements
  • product standards
  • health and safety limits.
  • advertising campaigns to purchase domestically produced goods and services, such as the 'Buy British' campaign.

Activity 7: National defence

Start by watching the following short video and then answer the question that follows:

To what extent is the UK using national defence as a barrier to trade?

The UK and perhaps Canada are reluctant to grant permission to Huawei to provide services for its 5G network on national security grounds.  The Chinese Tech company is clearly the best provider of services in the industry so the UK limiting their involvement is effectvely a quota applied on Chinese exports.

Activity 8: Link to the assessment (paper two type) - old syllabus

China's steel industry - what's the problem?

Chinese steel production has expanded hugely. Over the past 25 years, output has grown more than 12-fold. By comparison, the EU's output fell by 12% while the US's remained largely flat.  Much of the excess Chinese production has been exported into USA and EU, some say illegally dumped on EU markets.  Source BBC

Consider the above when answering the following paper two examination question:

(a) define the following terms:

i. quota [2 marks]

A quota represents a limit on the number or value of a good or service that a country will allow into the country, e.g. a country limiting the amount of steel imported to just 100,000 tonnes per year.  Alternatively a quota may consist of a specific quota allocated to each country.

ii. free trade [2 marks]

Free trade means a policy of non interference by governments in the sale or purchase of goods and services in international markets.  This means not applying tariffs, or any other form of protection to imports as well as not providing subsidies to export industries.

(b) Using an appropriate diagram, illustrate the effect on the EU market for steel following the imposition of a tariff on the import of steel products.  [4 marks]

Prior to the imposition of the tariff the EU market for steel can be represented by P2 and Q3, with 0, Q2 supplied by domestic businesses and Q2 to Q3 imported into the trading bloc.  The revenue received by European firms is illustrated by (0, Q2 x 0, P2), with foreign businesses sharing a revenue equal to (Q2, Q3 x 0, P2).

After the government places a tariff, illustrated on the diagram world supply shifts upwards to World S + tariff and the price paid by EU firms for steel is shown by P3.  The new equilibrium output is represented by Q5.

Following the tariff EU steel producers see increased revenue to Q2 x P3 and the revenue of imported firms falls by area A and D.

Award 2 marks for a correct definition and 2 for an accurately drawn diagram.

(c) Illustrate the effect of the above decision on the market for Chinese steel products.  [4 marks]

As a major exporter of steel, the loss of an important export market will reduce the total demand for steel from D1 to D2, meaning a new equilibrium is forged at P2, Q2.

(d) Evaluate the arguments for and against the EU placing a tariff on imported steel products from China to protect their own domestic industries.  [8 marks]

Command term: Evaluate

The command term in this question is evaluate, which means make a judgement as to whether free trade or protectionism in the steel market is the most beneficial for the EU.

Key term to define - tariff barrier.

Arguments against a tariff on imported steel products include:

Different parts of the world enjoy different factor resources and perhaps the EU nations are unable to produce domestic steel efficiently?  In which case they maybe better served focusing instead on the production of goods and services where they do enjoy a comparative advantage. 

Imported steel from outside the bloc provides domestic industries with lower priced steel.  Those relying on the processed metal in their production will enjoy lower production costs and consumers will then benefit from cheaper products across the economy.

Competition from cheap steel producers will also encourage greater efficiency within EU steel businesses for fear of being driven out of business. 

By contrast the arguments in support of a tariff on imported steel products include:

Cheap imports of steel have led to rising unemployment levels in the industry.  Some governments may also be guilty of 'dumping', in which case the EU is within their rights to impose protectionist measures, designed to cancel out any advantage.  

Steel may have important strategic and national security uses and an over dependance on steel imports may leave the EU without adequate supplies, if there is either a shock to the supply chain or the political or economic circumstances change. 

Responses would be expected to use extracts from the passage in order to reach the higher grade bands.

The paper two type question is available as a PDF file at:  China's steel industry, what's the problem?

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