Reasons for Trade Restrictions (Cambridge International IGCSE Economics)
Why do countries restrict trade?
Spec point — "• protect infant (sunrise) industries • protect declining (sunset) industries • protect strategic industries • avoid dumping • reduce a deficit on the current account of the balance of payments • raise tax revenue • restrict the import of demerit goods • promote environmental sustainability"
Why do countries restrict trade?
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Free trade aims to maximise global output through national specialisation
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However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
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The restriction of trade is called protectionism and may take the form of:
- Import tariffs
- Export subsidies
- The use of quotas
- Trade embargoes
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Trading partners may retaliate to any methods of protectionism and they should be carefully considered before any implementation
Reasons for protectionism
| Reason | Explanation |
|---|---|
| Protect infant (sunrise) industries | - New industries may need protection from foreign competition until they become efficient and competitive. - Example: A developing country supporting its growing solar panel sector |
| Protect declining (sunset) industries | - Old industries that are shrinking may be protected to slow down job losses and help manage transition. - Example: Coal mining in some countries |
| Protect strategic industries | - Essential sectors (like food, energy and defence) are protected to maintain national security - Example: Limiting foreign control of telecoms or arms production |
| Avoid dumping | - Dumping is when foreign producers sell goods below cost to gain market share - Restrictions help protect domestic firms from unfair competition |
| Reduce current account deficits | - Reducing imports can help improve the balance of payments by reducing the money flowing out of the country |
| Raise tax revenue | - Tariffs on imports generate revenue for governments, which is especially useful in countries with weak tax systems |
| Restrict demerit goods | - Importing goods like alcohol or tobacco may be restricted to reduce harm to public health |
| Promote environmental sustainability | - Restrictions can be placed on goods that damage the environment or are produced in harmful ways - Example: Limiting imports from deforestation-linked supply chains |
Consequences of trade restrictions
Spec point — • impact of trade restrictions on the home country and its trading partners
Impact on trading partners
- Countries affected by the restrictions may lose export markets
- Tensions may increase, possibly leading to trade wars
- Can reduce income for producers and lead to job losses abroad
- Might encourage affected countries to form alternative trade agreements, leading to a loss of future exports
Impact on the home country
| Advantages | Disadvantages |
|---|---|
| - Protects local jobs and industries - Encourages domestic production - Increases government revenue through tariffs - Can improve trade balance (fewer imports) | - Consumers face higher prices and less variety as trade restrictions increase import costs - Domestic firms may become less efficient without competition - Can provoke retaliation from other countries - Slower innovation and limited access to better technology |
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