Reasons for trade restrictions: restrict the import of demerit goods

International Trade and Globalisation

Topic: Globalisation and Trade Restrictions

Objective: Reasons for Trade Restrictions – Restrict the Import of Demerit Goods

Demerit goods are products that are considered harmful to individuals or society, such as tobacco, alcohol, sugary drinks, and certain hazardous chemicals. Governments may intervene in international trade to limit the consumption of these goods.

Why Governments Restrict Imports of Demerit Goods

• Public health protection – Reducing exposure to harmful substances lowers disease prevalence and health‑care costs.
• Externalities – Consumption creates negative externalities (e.g., second‑hand smoke, environmental damage) that are not reflected in market prices.
• Social welfare – Limiting demerit goods can improve overall social welfare and productivity.
• Revenue considerations – While some governments tax demerit goods for revenue, they may also restrict imports to prevent market saturation that would undermine health goals.
• International commitments – Agreements such as the WHO Framework Convention on Tobacco Control encourage member states to limit harmful imports.

Common Trade Restrictions Used to Limit Demerit Goods

1. Import bans – Complete prohibition of specific goods.
2. Import quotas – Limiting the quantity that can be imported each year.
3. Tariffs – Imposing high duties to raise the price and reduce demand.
4. Technical standards – Requiring health‑related certifications, labelling, or packaging that increase compliance costs.
5. Subsidies for domestic alternatives – Supporting healthier domestic products to compete with imported demerit goods.

Economic Rationale – The Negative Externality Framework

The market equilibrium for a demerit good ignores the external cost (\$E\$). The socially optimal quantity (\$Q_{S}\$) is where marginal private cost (MPC) plus external cost equals marginal benefit (MB):

\$\text{MPC} + E = \text{MB}\$

Import restrictions shift the effective price upward, moving quantity closer to \$Q_{S}\$.

Illustrative Table – Effects of Different Restrictions

Evaluation – Advantages and Disadvantages

• Advantages

  • Reduces consumption of harmful goods, improving public health.
  • Internalises negative externalities, moving the market toward a socially optimal outcome.
  • Can generate government revenue (tariffs) that may be earmarked for health programmes.
  • Signals societal values and can encourage domestic producers of healthier alternatives.

• Disadvantages

  • May lead to black‑market activity or smuggling, undermining the policy.
  • Higher prices can disproportionately affect low‑income consumers who already purchase these goods.
  • Trade restrictions can provoke retaliation from trading partners, affecting other export sectors.
  • Administrative costs of monitoring and enforcing standards or quotas.

Real‑World Examples

• Australia’s high import tariffs on tobacco to keep prices above $30 per pack.
• India’s ban on the import of certain hazardous chemicals used in pesticides.
• EU’s mandatory health warnings on imported alcoholic beverages.
• South Africa’s quota system for imported sugary drinks introduced in 2022.

Key Points to Remember for Exams

1. Identify a good as a demerit good and explain the negative externality it creates.
2. State the main objective of restricting its import – protecting health and internalising external costs.
3. Describe at least two types of trade restrictions and how they affect price and quantity.
4. Use the externality diagram or the tariff supply‑and‑demand diagram to illustrate the economic effect.
5. Provide a balanced evaluation, mentioning both health benefits and possible economic drawbacks.