Reasons for trade restrictions: promote environmental sustainability

International Trade & Globalisation (Cambridge IGCSE 0455)

1. The Basic Economic Problem

• Scarcity – unlimited wants, limited resources.
• Production Possibility Curve (PPC)
  • Shows maximum output of two goods when resources are fully and efficiently used.
  • Points on the curve = efficient; inside = under‑utilised; outside = unattainable.

  Diagram (placeholder): PPC with a shift outward to illustrate economic growth.

• Opportunity Cost – value of the next best alternative foregone.
  • Example: Choosing to produce 1 000 t of wheat instead of 500 t of cloth; the opportunity cost of wheat is the cloth not produced.
• Factors of Production – Land, Labour, Capital, Entrepreneurship (the 4 Ls).
• Factor Rewards – Rent (land), Wage (labour), Interest (capital), Profit (entrepreneurship).

2. Allocation of Resources

2.1 Demand and Supply

• Law of Demand: price ↑ → quantity demanded ↓ (ceteris paribus).
• Law of Supply: price ↑ → quantity supplied ↑ (ceteris paribus).
• Market equilibrium where Qd = Qs.
• Shifts:
  • Demand shifts left/right due to income, tastes, prices of related goods, expectations, number of buyers.
  • Supply shifts left/right due to input prices, technology, taxes/subsidies, expectations, number of sellers.

• Diagram (placeholder): Demand‑supply graph showing a right‑ward demand shift and new equilibrium.

2.2 Elasticities

2.3 Market Failure

• Public Goods – non‑rival & non‑excludable (e.g., street lighting).
• Merit/Demerit Goods – under‑ or over‑consumed relative to society’s optimum.
• Externalities
  • Negative (pollution) – marginal social cost (MSC) > marginal private cost (MPC).
  • Positive (vaccination) – marginal social benefit (MSB) > marginal private benefit (MPB).
• Monopoly & Imperfect Competition – price‑setting power leads to allocative inefficiency.

2.4 Government Intervention (Micro‑level)

• Price ceilings (e.g., rent control) – can cause shortages.
• Price floors (e.g., minimum wage) – can cause surpluses.
• Taxes – shift supply curve upward by the amount of the tax.
• Subsidies – shift supply curve downward.
• Regulation & standards – non‑tariff measures (NTMs) that affect market outcomes.

3. Micro‑Economic Decision‑Makers

• Households – maximise utility; decide how much to work, spend and save.
• Firms – aim to maximise profit; decide output, price (in competitive markets) and factor demand.
• Workers – supply labour; wage determined by intersection of labour‑demand and labour‑supply curves.
• Money & Banking
  • Functions of money: medium of exchange, unit of account, store of value.
  • Banking creates money through deposits and loans (fractional‑reserve system).
• Market Types – Perfect competition, monopolistic competition, oligopoly, monopoly.

4. Macro‑Economic Context (Relevant for Trade)

• GDP – total market value of final goods & services produced in a year (expenditure, income, production approaches).
• Inflation – sustained rise in the general price level; measured by CPI or RPI.
• Unemployment – % of labour force without work but seeking employment; types: frictional, structural, cyclical.
• Fiscal Policy – government spending & taxation to influence aggregate demand.
• Monetary Policy – central‑bank actions (interest rates, reserve requirements) to control money supply.
• Balance of Payments (BOP)
  • Current account – trade in goods & services, income, transfers.
  • Capital & financial account – flows of investment.

5. International Trade & Globalisation

• Globalisation – increasing integration of world economies through the rapid movement of goods, services, capital, technology and people.
• Key drivers:
  • Transport advances (container ships, low‑cost airlines).
  • Communication & IT (Internet, mobile devices).
  • Trade liberalisation (WTO, regional blocs).
  • Multinational Companies (MNCs) operating in several countries.
• Benefits of Trade
  • Specialisation & comparative advantage → higher total output.
  • Access to a wider variety of goods at lower prices.
  • Technology transfer & economies of scale.
• Costs of Trade
  • Domestic industries may shrink (declining‑industry).
  • Potential for “race to the bottom” on labour or environmental standards.
  • Dependence on foreign suppliers (supply‑chain risk).

6. Why Governments Impose Trade Restrictions? (Main Motives)

1. Infant‑industry protection – help new domestic firms develop a competitive edge.
2. Declining‑industry protection – prevent collapse of sectors losing market share to imports.
3. Strategic or security reasons – safeguard goods essential for defence or public safety.
4. Anti‑dumping measures – counter imports sold below cost to drive domestic producers out.
5. Balance‑of‑payments relief – reduce a current‑account deficit by limiting import expenditure.
6. Environmental sustainability – limit trade that harms the environment or depletes scarce resources.

7. Common Trade‑Restriction Instruments

• Tariff – tax on imported goods. Raises the import price, shifts the import‑demand curve leftward and reduces quantity imported.

  Diagram (placeholder): World price Pw, domestic price Pw + t, reduced import quantity.

• Import quota – quantitative limit on the amount of a specific good that may be imported in a period.
• Export subsidy – payment to domestic producers to encourage export; effectively lowers the export price.
• Export tax (levy) – tax on goods leaving the country, used to conserve scarce resources.
• Embargo / trade ban – complete prohibition on trade with a particular country or on a specific product.
• Non‑tariff measures (NTMs) – standards, licences, or certification requirements that restrict trade without using a tax or quota (e.g., safety, quality, environmental standards).

8. Multinational Companies (MNCs)

• Operate in two or more countries, transferring capital, technology and managerial expertise.
• Locate production where factor costs are lowest → can create pressure for anti‑dumping duties or other restrictions.
• Subject to host‑country regulations, including environmental standards that may act as NTMs.

Trade Restrictions to Promote Environmental Sustainability

9. Key Environmental Objectives of Trade Policy

• Reducing carbon emissions – discourage imports of high‑carbon goods; apply carbon‑based border taxes.
• Preventing habitat destruction – ban products linked to illegal logging, palm‑oil expansion, wildlife trade.
• Managing waste & pollution – restrict hazardous‑waste shipments and high‑pollutant products.
• Conserving scarce resources – quotas on over‑exploited fish stocks, rare minerals, freshwater.
• Encouraging sustainable production – mandatory standards or certification schemes (organic, Fairtrade, MSC).

10. Typical Environmental Trade‑Restriction Tools

1. Carbon Border Adjustment Tax (CBAT) – duty proportional to the embedded CO₂ in imported goods.
2. Import bans or quotas on products linked to deforestation, illegal wildlife trade or over‑fishing.
3. Export licences or quotas for resources that are environmentally sensitive or scarce.
4. Mandatory product standards (energy‑efficiency labels, emissions limits, chemical restrictions).
5. Subsidies or tax incentives for domestic firms that meet recognised green criteria.

11. Illustrative Table of Environmental Restrictions

12. Economic Theory Behind Environmental Trade Restrictions

When production creates a negative externality (e.g., pollution), the private marginal cost (PMC) is lower than the marginal social cost (MSC). The market therefore produces a quantity Q_mkt that exceeds the socially optimal quantity Q_opt, generating dead‑weight loss (DWL).

$$\text{DWL}= \frac{1}{2}\;(Q_{mkt}-Q_{opt})\;(P_{opt}-MC)$$

Imposing a tax or tariff equal to the marginal external cost (MEC) shifts the supply curve upward by that amount, moving output to Q_opt and eliminating the DWL.

Diagram (placeholder): Supply‑demand graph with MSC curve above MC, showing the corrective tax.

13. Advantages and Disadvantages of Environmental Trade Restrictions

• Advantages
  • Encourages greener production and technology adoption.
  • Helps countries meet international climate commitments (e.g., Paris Agreement).
  • Protects domestic ecosystems, public health and biodiversity.
  • Can generate revenue for environmental projects (e.g., CBAT funds).
• Disadvantages
  • Higher prices for imported goods may reduce consumer welfare.
  • Risk of WTO disputes if measures are viewed as discriminatory.
  • Complex administration and verification (e.g., proving carbon content or legal timber origin).
  • Potential “carbon leakage” if producers relocate to jurisdictions with looser rules.

14. Exam‑Focused Summary (AO1‑AO3)

15. Suggested Diagrams for Revision

1. Supply‑demand graph showing the effect of a tariff on import price and quantity.
2. PPC shift illustrating economic growth from trade.
3. Externality diagram (MSC vs. MC) with corrective tax.
4. Flowchart of a Carbon Border Adjustment Tax: high‑carbon import → tax → higher price → incentive to reduce emissions → revenue → green‑project funding.