Question

1. Three policies used to restrict trade are: tariffs, quotas, and regulatory trade restrictions. Discuss each of these policies.

2. There are four main reasons why economists typically oppose the use of trade restrictions. (1). From a global perspective, free trade increases total output. (2). International trade provides competition for domestic companies. (3). Restrictions based on national security are often abused. (4). Trade restrictions are addictive. Discuss each of these reasons.

Answer 1

1.
Tariffs are a trade barrier where the additional taxes and or duties are applied upon the import or export of the goods when an international trade takes place. It is done for the different reasons. The first reason is to protect the domestic manufacturers, jobs and industries in nascent stages. The tariffs applied, will raise the cost of the imported goods and will become at par with the locally manufactured products. So, in price, there will be no differentiation. It will also restrict the supply of foreign manufactured goods. Another important reason is that it fetches a good amount of revenues to the government that is further used for other purposes.

Quotas are non-tariff barrier where the import of goods is allocated on the basis of quota. Here, tariffs are not charged, but the total quantity of import is limited. As a result, the influence of the imports upon the nascent industries will be limited and creates a suitable environment for the growth of the domestic industries.

Regulated trade restrictions are the set of regulations that affect the market entry, expansion and investments by the foreign enterprises. These regulations apply to FDIs and limit the entries of the foreign players. For example, there is a government restriction upon the entry of foreign players in the nuclear energy sector in India. It is due to the reason that it is the sector associated with the nation security. In India, any foreign player willing to enter the insurance sector will have to come along with the domestic Partner in India. Such restrictions have also been seen in the retail industry in India till the recent past, it is now open to FDI in retail. The government regulations can be specific to the nation or group of nations also if it can impact the national security.
So, different scenarios of the economy can cause the government to take different policy initiatives to bring trade restrictions.

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