Barriers to trade (calculations are HL only)

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, raising equilibrium price to $7 and reducing total consumption to 12,000 Kgs. 

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

  • the new level of domestic supply
  • the new quantity of imported corn
  • 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 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, of $5 per Kg which completely eliminates the the cost advantage of imported produce.

(a) Illustrate this on the diagram and indicate the size of the subsidy, assuming that domestic firms are now able to satisfy the entire nation's demand for corn at $5.

(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 effectively a quota applied on Chinese exports.

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