Types of trade restrictions / methods of protection: embargoes

6.2 Trade Restrictions – Overview

6.2.1 Types of Trade Restrictions

6.2.1.1 Tariff

• Definition: A tax levied on imported goods at the border.
• Typical uses (syllabus): Protect infant or strategic domestic industries; raise government revenue; counteract dumping.
• Economic impact:

  • Higher import prices → reduced import volumes.
  • Domestic producers gain market share; consumers pay more.
  • Possible retaliation by trading partners (trade wars).

• Advantages: Simple to administer; generates revenue; can protect jobs in targeted sectors.
• Disadvantages: Increases cost of living (price‑stability aim); may provoke retaliation; can reduce overall economic efficiency.
• AO3 evaluation points: effectiveness, cost to consumers, impact on employment, balance‑of‑payments, environmental implications (e.g., blocking greener imports).

6.2.1.2 Quota

• Definition: A quantitative limit on the amount of a specific good that can be imported during a set period.
• Typical uses (syllabus): Protect specific sectors; manage balance of payments; respond to sudden surges in imports.
• Economic impact:

  • Creates artificial scarcity → domestic price rise.
  • Domestic producers benefit; consumers face higher prices.
  • Risk of smuggling and black‑market activity.

• Advantages: Direct control over import volumes; can be targeted to particular products.
• Disadvantages: Leads to higher consumer prices; may breach WTO rules; can encourage illicit trade.
• AO3 evaluation points: short‑ and long‑term effects on inflation, employment, balance‑of‑payments, and any environmental trade‑offs.

6.2.1.3 Subsidy

• Definition: Financial assistance (cash, tax breaks, low‑interest loans) given to domestic producers to lower their costs or raise output.
• Typical uses (syllabus): Boost competitiveness of strategic or infant industries; achieve policy goals such as renewable‑energy expansion.
• Economic impact:

  • Domestic output rises; export potential may increase.
  • Distorts market prices and can provoke WTO disputes.
  • Fiscal cost to government – may affect fiscal balance.

• Advantages: Encourages domestic innovation; can support employment and growth in targeted sectors.
• Disadvantages: Misallocation of resources; fiscal burden; possible retaliation from trade partners.
• AO3 evaluation points: effectiveness in achieving strategic aims, cost to taxpayers, impact on employment, price stability, and any environmental side‑effects.

6.2.1.4 Embargo

• Definition: A government order that completely bans trade (imports, exports, or both) with a specified country, group of countries, or particular goods.
• Typical uses (syllabus): Political pressure, national security, UN‑mandated sanctions, response to human‑rights violations.
• Economic impact: See section 6.2.3 (Economic consequences) for a detailed table.
• Advantages: Strong non‑military tool for diplomatic pressure; can be coordinated multilaterally for greater effect.
• Disadvantages: Often harms civilian populations; can damage exporting industries in the imposing country; may undermine environmental goals if green technology is blocked.
• AO3 evaluation points: effectiveness, economic cost to both sides, humanitarian impact, level of international cooperation, environmental considerations.

6.2.2 Reasons for Trade Restrictions (syllabus 6.2.3)

• Protect infant or strategic domestic industries.
• Prevent dumping and protect against unfair competition.
• Safeguard national security (e.g., arms, dual‑use technology).
• Address balance‑of‑payments problems.
• Promote political objectives – pressure regimes, enforce UN resolutions, respond to human‑rights abuses (embargoes).
• Environmental or sustainability goals (e.g., restrict imports of high‑carbon goods).

6.2.3 Economic Consequences of Trade Restrictions

6.2.4 Embargoes – In‑Depth

Definition (6.2.4.1)

An embargo is the most severe non‑military trade restriction: it completely bans trade with a target country, a group of countries, or a specific category of goods.

Key Characteristics (6.2.4.2)

• Scope: Total (all goods & services) or partial (e.g., arms, oil, luxury items).
• Duration: Temporary (conflict‑related) or long‑term until political conditions change.
• Legal basis:

  • National legislation (e.g., UK Export Control Order 2008, US International Emergency Economic Powers Act).
  • UN Security Council Resolutions (e.g., UNSCR 661 on Iraq).
  • Regional sanctions regimes (EU Common Foreign and Security Policy).

• Enforcement: Customs authorities and specialised agencies (e.g., US Office of Foreign Assets Control, UK Export Control Joint Unit) use:

  • Licensing systems – exporters must obtain a licence; refusal makes the trade illegal.
  • Monitoring of shipping manifests, cargo inspections and electronic tracking.
  • Penalties – fines, seizure of goods, and imprisonment for breaches.

Typical Uses (6.2.4.3) – as required by the syllabus

1. Exert political pressure on a regime (e.g., condemning aggression).
2. Protect national security by preventing transfer of strategic goods.
3. Implement UN‑mandated sanctions agreed by the international community.
4. Respond to human‑rights violations or humanitarian crises.

Economic Impact (6.2.4.4)

See the table in section 6.2.3 for a breakdown of short‑ and long‑term effects on the home country, target country and third‑party states.

Political Outcomes (6.2.4.5)

• Can achieve diplomatic objectives without resorting to armed conflict.
• May harden the target regime’s stance, leading to prolonged hostility.
• Multilateral coordination generally increases effectiveness and reduces evasion.
• Humanitarian criticism arises when civilian suffering outweighs political gains.

6.2.5 Comparison of Trade Restrictions

6.2.6 Case Study – United Nations Embargo on Iraq (1990‑2003) (6.2.6.1)

Following Iraq’s invasion of Kuwait, the UN Security Council imposed a comprehensive embargo that banned the export of oil and most other goods to Iraq.

• Economic effects on Iraq: Oil revenue fell by > 90 %; massive budget deficits; severe shortages of food, medicine and industrial inputs; inflation surged.
• Effects on imposing countries: Exporters of oil‑related equipment lost a market; some European firms reported job cuts.
• Humanitarian impact: Widespread malnutrition and health crises; led to the “Oil‑for‑Food” programme as a partial mitigation.
• Political outcome: Weakened Iraq’s war‑fighting capacity but did not compel a policy change until the 2003 invasion.

6.2.7 Advantages and Disadvantages of Embargoes (6.2.7.1)

6.2.8 Evaluation Framework (AO3) (6.2.8.1)

When assessing an embargo, consider the following criteria:

1. Effectiveness: Did the embargo achieve its stated political or security objective?
2. Economic cost: Short‑ and long‑term impacts on employment, inflation, balance of payments and fiscal revenue for both parties.
3. Humanitarian impact: Were civilian suffering and health outcomes disproportionate to the political gain?
4. International cooperation: Multilateral vs unilateral – effect on compliance and evasion.
5. Environmental considerations: Did the restriction impede the flow of environmentally‑friendly technologies or affect sustainability targets?

6.2.9 Links to Macro‑economic Aims (6.2.9.1)

• Growth: Trade restrictions can dampen GDP growth by reducing export markets or import‑derived inputs.
• Employment: Loss of export markets may cause job losses; protection of domestic sectors may preserve jobs.
• Price stability: Shortages and higher import prices can fuel inflation.
• Balance‑of‑payments: Embargoes can improve the current account of the imposing country (fewer imports) but worsen that of the target.
• Redistribution: Benefits to protected domestic industries may be offset by higher costs for consumers.
• Sustainability: Blocking green imports hinders environmental goals; encouraging domestic green‑tech can support them.

6.2.10 Foreign Exchange Rates – Brief Overview (6.2.10.1)

• Definition: The price of one currency expressed in terms of another.
• Types of regimes: Fixed/pegged, floating, managed float.
• Demand for a currency: Exports, foreign investment, tourism, speculation.
• Supply of a currency: Imports, repatriated profits, foreign aid, central‑bank interventions.
• Consequences of a change:

  • Depreciation → cheaper exports, more expensive imports (helps balance of payments but can raise inflation).
  • Appreciation → cheaper imports, more expensive exports (may reduce inflation but worsen trade balance).

• Link to embargoes: An embargo often forces the target country to rely on a limited set of currencies, putting pressure on its exchange rate and foreign‑exchange reserves.

6.2.11 Current Account of the Balance of Payments – What You Need to Know (6.2.11.1)

The current account records a country’s trade in goods and services, plus income flows and unilateral transfers.

Effect of trade restrictions: Tariffs, quotas or embargoes directly affect the “Goods” component, while subsidies can influence the “Services” and “Primary income” components by altering competitiveness.

6.2.12 Suggested Diagram (6.2.12.1)

6.2.13 Key Points to Remember (6.2.13.1)

1. An embargo is a total ban on trade with a target, distinct from partial measures such as tariffs or quotas.
2. Its primary purpose is political, but the economic side‑effects (employment, inflation, balance‑of‑payments, sustainability) are significant and must be evaluated.
3. When answering AO3 questions, weigh intended political outcomes against unintended humanitarian, economic and environmental costs.
4. Trade restrictions interact with foreign‑exchange rates and the current account – understanding these links helps explain wider macro‑economic consequences.

6.2.14 Practice Questions (6.2.14.1)

1. Explain why a government might choose an embargo rather than a tariff when dealing with a hostile nation.
2. Discuss two potential economic disadvantages for the country that imposes an embargo.
3. Using the UN embargo on Iraq (1990‑2003) as a case study, assess whether the embargo achieved its political objectives and evaluate its humanitarian costs.
4. Analyse how an embargo could affect a country’s environmental sustainability goals.
5. Compare the likely impact of a tariff and an embargo on a country’s current account balance.
6. Explain how an embargo can influence the target country’s exchange rate and why this matters for its economy.