IB Economics/International Economics/Free trade and protectionism

Free Trade and Protectionism

 * Definition of free trade: The unobstructed trade of goods and services between two countries with no restrictions on imports and exports.
 * Definition of protectionism: where a country erects barriers to trade in order to protect the domestic economy from the disadvantages of international trade.


 * Types of protectionism.
 * tariffs: Tax on imports.
 * Quotas: A restriction on the physical number of a particular import.
 * Subsidies: A grant given to producers of a good.
 * Voluntary Export Restraints (VERS): Political pressure placed on a country not to export a good.
 * Administrative obstacles: Bureaucracy. VERs, voluntary export restraints, through pressuring country e.g. Japanese export restraints of vehicles to UK.
 * Embargo: A total ban of the import of a particular good.
 * Health and safety standards: Not accepting goods because of possible health risks.
 * Environmental standards: Not accepting goods due to pollutive biproducts, e.g. certain chemicals, not being handled correctly.
 * Import license: A payment to the government for the right to import.


 * Arguments for protectionism.
 * Infant industry argument: This argument suggests that an industry needs times to develop. This takes into account that it needs to develop economies of scale and a learning curve.
 * Efforts of a developing country to diversify.
 * Protection of domestic employment.
 * Source of government revenue: The consumer has the burden.
 * Strategic arguments.
 * Means to overcome a balance of payments disequilibrium.
 * Anti-dumping: Dumping is known as the selling of goods on the international market below the production cost.


 * Arguments against protectionism.
 * Inefficiency of resource allocation.
 * Costs of long-run reliance on protectionist methods.
 * Increased prices of goods and services to consumer.
 * The cost effect of protected imports on export competitiveness.
 * Less choice for the consumer.
 * Industries may not develop because of a disincentive to be competitive.
 * Trade war.
 * Protection of corrupt management.
 * Negative effect in employment in import sector.
 * Decrease of international competitiveness if imported good is an input for an exporting good.