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