Advantages and disadvantages of restricting free trade

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Globalisation and Trade Restrictions

International Trade and Globalisation – Globalisation and Trade Restrictions

Learning Objective

Understand the advantages and disadvantages of restricting free trade.

Key Concepts

  • Globalisation: The increasing integration of world economies through the flow of goods, services, capital, people and ideas.

  • Free Trade: The unrestricted exchange of goods and services between countries.

  • Trade Restrictions: Government measures that limit or control international trade. These include tariffs, quotas, subsidies, import licences and voluntary export restraints.

Why Governments Impose Trade Restrictions

Governments may intervene in international markets for several reasons, such as protecting domestic industries, safeguarding employment, ensuring national security, or correcting market failures.

Advantages of Restricting Free Trade

  1. Protection of Infant Industries

    Newly emerging sectors may need time to develop competitive efficiencies before facing international competition.

  2. Preservation of Jobs

    Restricting imports can reduce the risk of domestic job losses in vulnerable sectors.

  3. National Security

    Strategic industries (e.g., defence, energy) are kept under domestic control.

  4. Balance of Payments Improvement

    Reducing imports can help correct a current‑account deficit.

  5. Environmental and Health Standards

    Restrictions can prevent the entry of goods that do not meet domestic safety or environmental criteria.

Disadvantages of Restricting Free Trade

  1. Higher Prices for Consumers

    Tariffs and quotas raise the cost of imported goods, reducing consumer welfare.

  2. Inefficiency and Misallocation of Resources

    Domestic producers may lack incentives to innovate or cut costs, leading to deadweight loss.

  3. Retaliation by Trading Partners

    Other countries may impose their own restrictions, harming export markets.

  4. Reduced \cdot ariety and Choice

    Consumers have access to fewer products and brands.

  5. Potential for Corruption

    Import licences and quotas can be allocated arbitrarily, leading to rent‑seeking behaviour.

Comparative Summary

AspectAdvantage of RestrictionDisadvantage of Restriction
Consumer WelfareCan protect domestic standardsHigher prices and less choice
Domestic IndustrySupports infant and strategic sectorsMay foster inefficiency and lack of innovation
EmploymentHelps preserve jobs in protected sectorsJob losses may occur in export‑oriented sectors if retaliation occurs
Balance of PaymentsCan reduce import billMay provoke trade wars, hurting exports
Environment/HealthBlocks harmful importsDomestic producers may not meet the same standards

Illustrative Diagram

Suggested diagram: A supply‑and‑demand graph showing the effect of a tariff on the domestic market – shift in supply curve, new equilibrium price, consumer surplus loss, government revenue, and deadweight loss.

Key Economic Formulas (LaTeX)

Deadweight loss from a tariff can be approximated by:

\$\$

\text{DWL} = \frac{1}{2} \times (\text{Quantity reduction}) \times (\text{Tariff per unit})

\$\$

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

\$\$

\Delta CS = -\left( \text{Price increase} \times \text{Original quantity} + \frac{1}{2} \times \text{Price increase} \times \text{Quantity reduction} \right)

\$\$

Discussion Questions

  • When might a government choose to subsidise an export rather than impose a tariff on imports?

  • How can trade restrictions affect developing countries differently from developed countries?

  • Evaluate the statement: “Free trade always leads to higher overall welfare.”

Summary

Restricting free trade can provide short‑term benefits such as protecting nascent industries and safeguarding jobs, but it often leads to higher consumer prices, inefficiencies, and the risk of retaliation. A balanced approach—using selective, temporary measures while encouraging competitiveness—tends to maximise long‑term economic welfare.