Impact of trade restrictions on the home country and its trading partners

International Trade and Globalisation – Globalisation and Trade Restrictions

Objective

To analyse the impact of trade restrictions on the home country and on its trading partners, and to place these effects within the wider context of globalisation.

1. Globalisation – definition, causes and consequences (Syllabus 6.2)

Definition

Globalisation is the increasing integration of world economies through the growth of international trade, investment, migration and the rapid spread of ideas, information and technology.

Key causes

• Lower transport costs – containerisation, cheaper shipping, air freight.
• Advances in information and communications technology (ICT) – Internet, mobile phones, satellite communications.
• Growth of multinational companies (MNCs) and foreign direct investment (FDI).
• Trade liberalisation – World Trade Organisation (WTO) rules, regional trade agreements (e.g., EU, NAFTA, ASEAN).

Consequences (positive and negative)

• Greater variety of goods and services for consumers.
• Opportunities for firms to access larger markets and cheaper inputs.
• Increased competition for domestic producers.
• Pressure on governments to protect vulnerable industries, leading to trade restrictions.
• Environmental impacts – increased production and transport can raise pollution and carbon emissions.
• Labour‑standard issues – race‑to‑the‑bottom pressures, but also diffusion of higher standards through MNCs.

2. Role of Multinational Companies (MNCs) (Syllabus 6.2)

3. What are Trade Restrictions?

Government measures that limit the free flow of goods and services between countries. The IGCSE syllabus focuses on the following forms (with brief examples):

• Tariffs – a tax on each unit imported. Example: a £200 duty on each imported car.
• Quotas – a quantitative limit on the amount that can be imported. Example: 10 000 tonnes of wheat per year.
• Import licences – permission that must be obtained before a good can be imported; often used to enforce quotas. Example: licences for steel imports.
• Subsidies – financial assistance to domestic producers (can be production subsidies or export subsidies). Example: a cash grant to domestic dairy farms.
• Embargoes / bans – a complete prohibition of trade in specified goods. Example: an embargo on arms sales to a sanctioned country.

4. Economic Theory – How Restrictions Work

In a perfectly competitive market the world price (P_w) is the price at which a country can import or export without any restrictions. Introducing a restriction shifts the domestic supply‑demand equilibrium.

Key equations (LaTeX notation):

• Consumer‑surplus loss due to a tariff:
  $$\Delta CS = \frac{1}{2}(Q_{d1}-Q_{d2})\times (P_t-P_w)$$
• Producer‑surplus gain:
  $$\Delta PS = \frac{1}{2}(Q_{s2}-Q_{s1})\times (P_t-P_w)$$
• Government revenue (tariff):
  $$GR = t \times Q_{m}$$ where t is the tariff per unit and Q_m is the quantity imported after the tariff.
• Dead‑weight loss (DWL):
  $$DWL = \frac{1}{2}\big[(Q_{d1}-Q_{d2})+(Q_{s2}-Q_{s1})\big]\times (P_t-P_w)$$

5. Impact on the Home Country

6. Impact on Trading Partners

7. Wider Economic Consequences

1. Terms of Trade – A large country that imposes a tariff on a heavily imported good can push the world price down, improving its terms of trade (import price falls relative to export price). Small countries have little influence on world prices.
2. Retaliation and Trade Wars – Restrictive measures can provoke retaliatory actions, potentially escalating into a trade war that reduces global welfare.
3. Resource Allocation – Protection may nurture infant industries, but prolonged protection can entrench inefficiency and raise production costs.
4. Political Economy – Interest groups (e.g., domestic producers) often lobby for protection, while consumers generally oppose higher prices. Governments must balance these pressures.
5. Environmental & Labour Implications – Restrictions can shield “green” or “fair‑trade” industries, but may also keep polluting or low‑wage sectors alive, affecting global sustainability goals.

8. Summary Checklist for Exam Answers

• Identify the type of restriction (tariff, quota, import licence, subsidy, export subsidy, embargo).
• Explain the direct effects on consumers, producers and government revenue in the home country.
• Draw a supply‑demand diagram, label the new equilibrium and the dead‑weight loss.
• Analyse the impact on the exporting partner – loss of export earnings and possible retaliation.
• Evaluate broader implications: terms of trade, global efficiency, political relations, and environmental/labour considerations.

9. Suggested Exam Questions

1. Explain how a tariff on imported cars would affect consumer surplus, producer surplus and government revenue in the home country.
2. Using a diagram, illustrate the impact of an import quota on a commodity and identify the dead‑weight loss.
3. Discuss two possible responses a trading partner might make if your country imposes an export subsidy on its agricultural products.
4. Evaluate the argument that protectionist policies can be justified for developing countries.
5. Define globalisation and outline two of its main causes. Explain how these causes can lead to the introduction of trade restrictions.
6. Compare the advantages and disadvantages of multinational companies for a host country and for their home country.