IGCSE Economics 0455 – Globalisation and Trade Restrictions
International Trade and Globalisation – Globalisation and Trade Restrictions
Objective
To understand the impact of trade restrictions on the home country and on its trading partners.
1. What are Trade Restrictions?
Trade restrictions are government measures that limit the free flow of goods and services between countries. The main forms are:
Tariffs – taxes on imported goods.
Quotas – limits on the quantity of a good that can be imported.
Subsidies – financial assistance to domestic producers to make their goods cheaper abroad.
Embargoes / Bans – complete prohibition of trade in certain goods.
2. Economic Theory – How Restrictions Work
In a perfectly competitive market, the world price (Pw) is the price at which a country can import or export without any restrictions. Introducing a restriction shifts the domestic supply‑demand equilibrium.
Suggested diagram: Supply and demand for an imported good showing the effect of a tariff (shift of supply curve upward by the tariff amount).
Key equations (LaTeX notation):
Consumer surplus loss due to a tariff: \$\Delta CS = \frac{1}{2}(Q{d1}-Q{d2})\times (Pt-Pw)\$
Tariff revenue = t × imports; subsidies require fiscal outlay.
Overall Economy
Dead‑weight loss (inefficiency)
Resources are diverted from more efficient foreign producers to less efficient domestic ones.
4. Impact on Trading Partners
Partner Country
Effect of Home Country’s Restriction
Potential Response
Exporters of the restricted good
Export revenue falls (lower quantity sold, possible price fall in world market)
Seek new markets, lobby for retaliation.
Consumers in partner country
May benefit if the restriction leads to lower world prices (e.g., reduced competition for domestic producers)
Generally neutral, unless retaliation raises their import costs.
Government of partner country
Potential loss of tariff revenue if the partner imposes a retaliatory tariff
May impose counter‑tariffs or negotiate trade agreements.
5. Wider Economic Consequences
Terms of Trade – If a large country imposes a tariff on a good it imports in large volumes, the world price may fall, improving its terms of trade (import price falls relative to export price). Small countries have little effect on world prices.
Retaliation and Trade Wars – Restrictive measures can provoke retaliatory actions, escalating into a trade war that reduces global welfare.
Resource Allocation – Protection may encourage development of domestic industries, but if protection is prolonged it can entrench inefficiency.
Political Economy – Interest groups (e.g., domestic producers) often lobby for protection, while consumers generally oppose higher prices.
6. Summary Checklist
Identify the type of restriction (tariff, quota, subsidy, embargo).
Analyse the direct effects on consumers, producers, and government revenue in the home country.
Calculate dead‑weight loss using the area of the triangles on the supply‑demand diagram.
Consider the impact on exporting partners – loss of export earnings and possible retaliation.
Evaluate broader implications for terms of trade, global efficiency, and political relations.
7. Suggested Exam Questions
Explain how a tariff on imported cars would affect consumer surplus, producer surplus and government revenue in the home country.
Using a diagram, illustrate the impact of an import quota on a commodity and identify the dead‑weight loss.
Discuss two possible responses a trading partner might make if your country imposes a subsidy on its agricultural exports.
Evaluate the argument that protectionist policies can be justified for developing countries.