Advantages and disadvantages of restricting free trade

International Trade and Globalisation – Globalisation and Trade Restrictions

Learning Objective (AO1‑AO3)

Explain the advantages and disadvantages of restricting free trade and evaluate the impact of trade restrictions on the home country and its trading partners. Use appropriate terminology, diagrams and quantitative reasoning.

Key Concepts (AO1)

• Globalisation: “the increasing integration of world economies through the flow of goods, services, capital, people and ideas”.
• Free Trade: Unrestricted exchange of goods and services between countries.
• Trade Restrictions: Government measures that limit or control international trade – tariffs, quotas, subsidies, import licences, voluntary export restraints (VERs) and embargoes.

Causes of Changes in Globalisation (Syllabus 6.2)

Four main drivers – give one brief example for each.

• Transport costs – falling container‑shipping rates make it cheaper to import electronics.
• Communication costs – the internet enables remote service delivery (e.g., call‑centre outsourcing).
• Trade‑restriction policies – removal of tariffs under a free‑trade agreement expands market access.
• Multinational company (MNC) activity – foreign direct investment (FDI) creates production networks across borders.

Consequences of Changes in Globalisation (Syllabus 6.2)

Area	Consequence (as stated in the syllabus)
Trade volume	Higher levels of imports and exports.
Competition	Increased competition for domestic firms.
Environment	Both positive (technology transfer) and negative (greater resource use) effects.
Migration	More movement of people for work or study.
Income distribution	Winners (owners of capital, skilled workers) and losers (low‑skill workers, some industries).
Economic development	Potential for faster growth in developing economies through export earnings.

Role of Multinational Companies (MNCs) (AO2)

Benefits and costs for four stakeholder groups.

Stakeholder	Benefit from MNCs	Potential Cost
Home country	Profits repatriated, technology spill‑overs.	Loss of domestic jobs if production is off‑shored.
Host country	FDI creates jobs, improves infrastructure.	Profit repatriation, possible crowding‑out of local firms.
Workers	Higher wages in export‑oriented sectors.	Job insecurity if MNCs relocate.
Consumers	Greater product variety, lower prices.	Potential loss of local brands.

Reasons Governments Impose Trade Restrictions (Re‑ordered to match syllabus)

1. Protect infant industries – new sectors need time to achieve economies of scale.
2. Protect declining (sunset) industries – prevent job loss in sectors losing competitiveness.
3. Protect strategic or national‑security industries – defence, energy, critical infrastructure.
4. Prevent dumping – stop foreign firms selling below cost to drive domestic producers out of business.
5. Correct a current‑account deficit / improve balance of payments – reduce import expenditure.
6. Raise tax revenue – tariffs generate government income.
7. Restrict de‑merit goods – products harmful to health or the environment (e.g., cigarettes, hazardous chemicals).
8. Protect environmental and health standards – block imports that do not meet domestic regulations.

Types of Trade Restrictions (AO1)

Restriction	Brief Definition	Typical Example	Price or Quantity?
Tariff	Tax on each unit of an imported good.	5 % duty on imported cars.	Price restriction
Import quota	Limit on the total quantity of a good that can be imported.	10 000 t of wheat per year.	Quantity restriction
Subsidy	Financial assistance to domestic producers or exporters.	Export subsidy for locally produced solar panels.	Price/quantity (lowers cost)
Import licence	Permission required from the government to import a specific good.	Licence needed for certain pharmaceuticals.	Quantity restriction (controlled access)
Voluntary Export Restraint (VER)	Exporting country voluntarily limits its shipments.	Japanese car manufacturers limit exports to the US.	Quantity restriction
Embargo	Complete prohibition on the import or export of a particular good or from a particular country.	Oil embargo on Country X after a political dispute.	Both price and quantity (zero quantity)

Advantages of Restricting Free Trade (AO2)

1. Protection of infant and declining industries – gives time to achieve economies of scale or to restructure.
2. Preservation of strategic and national‑security industries – ensures domestic control of defence, energy or critical infrastructure.
3. Improvement of the terms of trade – by reducing import demand a country can lower the price it pays for foreign goods, raising its purchasing power abroad.
4. Balance‑of‑payments correction – lower import volumes help reduce a current‑account deficit.
5. Revenue generation – tariffs provide a source of government income for public services.
6. Environmental, health and de‑merit‑goods protection – bans or duties keep harmful products out of the domestic market.
7. Counter‑dumping measure – anti‑dumping duties protect domestic producers from unfairly low‑priced imports.

Disadvantages of Restricting Free Trade (AO2)

1. Higher consumer prices and reduced choice – tariffs, quotas and embargoes raise the cost of imported goods and limit product variety.
2. Inefficiency and misallocation of resources – domestic firms face less competitive pressure, leading to lower productivity and dead‑weight loss.
3. Risk of retaliation – trading partners may impose their own restrictions, hurting the home country’s export sectors.
4. Potential for corruption and rent‑seeking – licences, quotas or VERs can be allocated arbitrarily, creating opportunities for bribery.
5. Negative impact on developing‑country exporters – restrictions by rich countries can disproportionately damage poorer nations that rely on a narrow range of exports.

Pros vs. Cons Matrix – Linking Reasons to Likely Consequences

Reason for Restriction	Short‑run Effect (Home Country)	Long‑run Effect (Home Country)	Effect on Trading Partners
Infant‑industry protection	Higher domestic output, jobs saved.	Risk of “protected” firms remaining inefficient.	Reduced export opportunities for partner’s firms.
Sunset‑industry protection	Job preservation in declining sector.	Prolonged structural unemployment if sector never modernises.	Loss of import demand for partner’s goods.
Strategic‑industry protection	Security of supply, political autonomy.	Potential higher production costs, limited innovation.	Limited access to advanced technology or components.
Anti‑dumping duties	Domestic producers regain market share.	May invite WTO disputes; higher prices persist.	Exporting country’s firms lose market share, may seek alternative markets.
Balance‑of‑payments correction	Reduced import bill improves current account.	Consumer welfare falls; possible retaliation.	Exporters in partner country lose sales.
Revenue generation	Immediate fiscal boost.	Growth‑reducing effect may offset revenue gains.	Higher prices for imported goods affect partner’s exporters.
De‑merit‑goods restriction	Public‑health gains, lower social costs.	Domestic producers may fill the gap with lower‑quality substitutes.	Exporters of the banned product lose market.
Environmental/health standards	Cleaner domestic market, compliance with national law.	Domestic producers may need costly upgrades.	Foreign firms must meet higher standards or lose access.

Diagram Checklist – Effect of a Tariff (AO2)

When drawing the supply‑and‑demand diagram, include and label:

• Domestic supply curve S₀ and domestic demand curve D.
• World supply curve (horizontal) at the world price P_w.
• Domestic supply after the tariff S₁ (parallel shift upward by the tariff amount).
• Equilibrium price before the tariff P₀ and quantity Q₀.
• Equilibrium price after the tariff P₁ and quantity Q₁.
• Consumer‑surplus loss (area between P₀ and P₁ under D).
• Producer‑surplus gain (area between P₀ and P₁ above S₀).
• Government revenue (rectangle between P₁‑P₀ and Q₁).
• Dead‑weight loss (two small triangles: one from reduced consumption, one from reduced domestic production).

Sample sketch (for reference only):

Key Economic Formulas (LaTeX) (AO2)

Dead‑weight loss from a tariff:

$$ \text{DWL} = \frac{1}{2}\times(\Delta Q)\times(\text{Tariff per unit}) $$

Change in consumer surplus (CS) due to a tariff:

$$ \Delta CS = -\Bigl(\Delta P \times Q_0 + \frac{1}{2}\times\Delta P \times \Delta Q\Bigr) $$

Where:

• \(\Delta P = P_1 - P_0\) (price increase).
• \(Q_0\) = quantity demanded before the tariff.
• \(\Delta Q = Q_0 - Q_1\) (reduction in quantity demanded).

Essential Terminology (AO1)

• Tariff – tax on each unit of an imported good.
• Quota – quantitative limit on imports.
• Subsidy – financial assistance to domestic producers or exporters.
• Import licence – government permission required to bring a particular good into the country.
• Voluntary Export Restraint (VER) – self‑imposed limit by an exporting country on the amount shipped to a particular market.
• Embargo – complete prohibition on the import or export of a specific good or from a particular country.

Evaluation Guidance (AO3)

When answering a Paper 2 question, structure your response as follows:

1. State the relevant reason(s) for the restriction. (e.g., infant‑industry protection)
2. Explain the short‑run impact on the home country. Use diagrams or quantitative reasoning where appropriate.
3. Discuss the likely long‑run outcome. Consider efficiency, innovation and the risk of dependence on protection.
4. Analyse the effect on trading partners. Include possible retaliation, loss of export earnings, or welfare gains if the partner benefits from higher world prices.
5. Weigh the benefits against the costs. Use the pros‑vs‑cons matrix to ensure a balanced judgement.
6. Conclude** – give a clear, justified judgement about whether the restriction is overall welfare‑enhancing for the home country (and, where relevant, for its partners).

Key points to remember for a strong evaluation:

• Distinguish short‑run (e.g., jobs saved) from long‑run (e.g., loss of competitiveness).
• Consider the **scope and selectivity** of the measure – targeted, temporary protection is usually more defensible than blanket bans.
• Identify the **distributional impacts** – who gains (producers, government) and who loses (consumers, exporters).
• Take account of **developed vs. developing country** contexts – restrictions by rich nations can have outsized effects on poorer exporters.
• Factor in **political feasibility** – public opinion, lobbying, and WTO commitments may limit what a government can do.

Discussion Questions (Practice for AO3)

• When might a government choose to subsidise an export rather than impose a tariff on imports? Provide real‑world examples.
• How do trade restrictions affect developing countries differently from developed countries?
• Evaluate the statement: “Free trade always leads to higher overall welfare.”
• Explain how an anti‑dumping duty works and why it might be justified.

Summary

Trade restrictions are useful policy tools for protecting infant or strategic industries, correcting balance‑of‑payments problems, raising fiscal revenue and safeguarding health, safety or the environment. However, they usually raise consumer prices, create inefficiencies, risk retaliation and can harm developing‑country exporters. Effective policy therefore tends to be selective, temporary and accompanied by measures that encourage domestic firms to become competitive in the long run. Mastery of the terminology, the tariff diagram and a balanced AO3 evaluation will secure full marks in the Cambridge IGCSE/A‑Level exam.