IB Economics/International Economics/Free trade and protectionism

From Wikibooks, open books for an open world
Jump to: navigation, search

Free Trade and Protectionism[edit]


  • Definition of free trade: The unobstructed trade of goods and services between two countries with no restrictions on imports and exports.
  • Definition of protectionism: where a country erects barriers to trade in order to protect the domestic economy from the disadvantages of international trade.
  • Types of protectionism
  • tariffs: Tax on imports
  • Quotas: A restriction on the physical number of a particular import.
  • Subsidies: A grant given to producers of a good.
  • Voluntary Export Restraints (VERS): Political pressure placed on a country not to export a good.
  • Administrative obstacles: Bureaucracy. VERs, voluntary export restraints, through pressuring country e.g. Japanese export restraints of vehicles to UK.
  • Embargo: A total ban of the import of a particular good.
  • Health and safety standards: Not accepting goods because of possible health risks.
  • Environmental standards: Not accepting goods due to pollutive biproducts, e.g. certain chemicals, not being handled correctly.
  • Import license: A payment to the government for the right to import.
  • Arguments for protectionism
  • Infant industry argument: This argument suggests that an industry needs times to develop. This takes into account that it needs to develop economies of scale and a learning curve.
  • Efforts of a developing country to diversify
  • Protection of employment
  • Source of government revenue: The consumer has the burden
  • Strategic arguments
  • Means to overcome a balance of payments disequilibrium
  • Anti-dumping: Dumping is known as the selling of goods on the international market below the production cost
  • Arguments against protectionism
  • Inefficiency of resource allocation
  • Costs of long-run reliance on protectionist methods
  • Increased prices of goods and services to consumer
  • The cost effect of protected imports on export competitiveness
  • Less choice for the consumer
  • Industries may not develop because of a disincentive to be competitive
  • Trade war
  • Protection of corrupt management
  • Negative effect in employment in import sector
  • Decrease of international competitiveness if imported good is an input for an exporting good