What are trade barriers?
Trade barriers are measures which restrict trade between countries eg tariffs
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
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
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