Purpose of Tariffs laws and import quotas

A2 Economics and Business
The purpose of tariffs, laws and
import quotas
By Mrs Hilton for revisionstation
Lesson objectives
• To be able to define tariffs, laws and import
• To be able to identify why tariffs, laws and
import quotas are used
• To be able to answer past paper questions on
the topic
From the spec
• The purpose of tariffs, laws, import quotas.
• Why tariffs, laws or import quotas are used,
for example to protect domestic industries or
balance of trade.
• Constraints on businesses that these barriers
• In teams define:
1. A Tariff
2. An Import Quotas
• What is the difference?
Define tariff
a tariff is a tax placed on an import to increase its price and decrease its demand
Tax can be imposed by governments to raise revenue and to restrict imports
A tariff is likely to raise the final price to the consumer – therefore a fall in demand
for the goods
Consumers will switch consumption to domestic goods
• A Tax on traded goods (imported or exported) by
• Could be to make imports unattractive to locals (so they
buy British) so they buy domestic goods instead.
– They could be a specific amount £1 per unit.
– or they could be (10% of price)
• Tariffs are an important barrier to free trade. They are
often imposed to protect domestic industry from cheap
imports. However, it often leads to retaliation with other
countries placing tariffs on their exports. (see next slide)
• Reduction in tariffs therefore creates trade
• http://www.youtube.com/watch?v=_e2gQxN1OBg
Reasons for Imposing Tariffs
• Raise revenue. If a country
produces no oil, levying a tax
on oil imports will raise money
as importers have no
alternative but to pay import
• Environmental. A tariff could
be placed on goods which may
have negative externalities.
• Protectionism. The most
common reason for a tariff.
Imposing import tariffs makes
domestic firms more
Advantages and disadvantages of
imposing tariffs
Home produced goods do not incur the tariff
and so are likely to be cheaper
The people who do benefit are the home
producers and their employees
Tariff protection allows them to sell more
because they gain a price advantage
compared to imports
Home producers gain price advantage
Better job security
Protect new businesses
Aid economic growth of the home country
Raise revenue for government spending
possibly on infrastructure
Reduces imports so improves balance of
Protects domestic infant industries so they
have a chance to flourish before being
swamped by cheaper imports
• High import price won’t put
many off
• Unfair competition
• Tariff may just increase
prices for consumers
• Restricts the volume of
• Other countries may impose
their tariffs in response to
this on their imports
Problems of Tariffs
• http://www.bbc.co.uk/schools/gcsebitesize/hi
• Stop at the end of the world is at hand
• A case to get rid of tariffs
• http://www.bbc.co.uk/news/business22649883
Define Import quota
• A quota is a physical limit
on the quantity of a good
imported. It is an example
of a physical control.
• Imposing a limit on the
quantity of goods that are
imported will increase the
share of the market
available for domestic
products (made in the
home country)
Start to build a fact file on 1) tariffs
and 2) quotas
• http://www.businessstudiesonline.co.uk/AsA2Bu
• Create a collaborative mindmap
• Exporting:
• http://www.bbc.co.uk/learningzone/clips/exportof-mange-tout/4505.html
• The process of imposing
tariffs and quotas on
imports to protect
domestic industry
• If a country imposes a
tariff it is likely that the
other country will
impose a retaliatory
tariff back on them.
Causes problems between countries
Trade liberalisation
• Trade liberalisation involves removing barriers
to trade such as tariffs on imports.
• Free Trade areas will have no tariffs between
member states, though they may have a
common external tariff if it is a trade bloc
(such as the EU).
During the period between the First and Second World Wars there
were unusually high tariffs between countries, which reduced the
volume of world trade. When peace was re-established following
World War II, representatives of 44 countries met at the United
Nations Monetary and Financial Conference in New Hampshire, to
discuss the rebuilding of Europe and issues such as high trade
barriers and unstable exchange rates. The outcome was an
agreement (referred to as the Bretton Woods Agreement)
outlining an international system of free trade, convertible
currencies, and fixed exchange rates. As part of the Bretton
Woods Agreement, the GATT was established in 1947 to reduce
barriers to international trade between nations. Under the GATT,
countries met periodically for negotiations, called “rounds,” to
lower trade restrictions between countries. Each round is named
for the country in which the meeting took place. The Uruguay
Round of negotiations, which lasted from 1986 to 1994, established
the World Trade Organisation (WTO) on January 1, 1995.
• http://www.youtube.com/watch?v=Y2X3KPilA
• Summarise arguments for and against
• http://www.youtube.com/watch?v=GiZfi8uQo
• Non-tariff barriers
Trade agreements - CEFTA
CEFTA is a trade agreement between Non-EU
countries in Central and South-Eastern
Europe. The agreement aims at establishing a
free trade zone in the region by 31 December
2010. As of 1 May 2007, the parties of
the CEFTA agreement are: Kosovo, Albania,
Bosnia and Herzegovina, Macedonia,
Moldova, Montenegro and Serbia.
CEFTA- central European free
trade agreement
Trade agreements – ASEAN
• The Association of
Southeast Asian
Nations (ASEAN)
was formed in 1967
by Indonesia,
Malaysia, the
Singapore, and
Thailand to
promote political
and economic
cooperation and
regional stability.
• Video
Trade agreements - EU
• There are no trade
barriers between EU
member states – this is
called the single market
• Businesses don’t pay tax
when they import goods
from other EU countries
• The EU provides export
opportunities for UK firms
• 27 member countries
includes UK
• Video
Trade agreements - NAFTA
• The North American Free Trade
Agreement (NAFTA) is a treaty
entered into by the United
States, Canada, and Mexico; it
went into effect on January 1,
• Video
Sample question 1
• Explain two likely reasons why India might
impose high tariffs on imports such as
cosmetics. [6]
Answer question 1
Knowledge 2, Application 2, Analysis 2
Knowledge: up to 2 marks are available for describing what a tariff is
and/or saying what it is used for, e.g. a tariff is a tax placed on an
import to increase its price and decrease its demand
Application: up to 2 marks are available for relating the above
giving two reasons as to why they might be imposed e.g. to protect
Indian cosmetic businesses from outside competition or to raise
revenue for government spending
Analysis: up to 2 marks are available for developing the reasons
e.g. giving infant industries a chance to grow without being swamped
by foreign competition thus preserving much needed employment or
that an increased stream of revenue may be useful for the Indian
government in order to fund investment in infrastructure and aid
economic growth.
Sample question 2
• [12]
How marks are awarded for Q1 [12]
Mark awarded
• e.g. The WTO helps to promote international trade and reduce barriers to
trade. MNCs are companies that trade/operate in more than one country.
• e.g. The WTO’s increasing membership may be expected to benefit
multinationals like Dell, much was made of China’s recent accession. Trade
liberalisation is the key here, the theory is that this has many benefits
including easing access to new or restricted markets for multinationals.
• e.g. Ukraine may be used as an example (not essential) as both a potential
market for the multinationals and a potential base for their operations.
For companies like Dell facing saturated and competitive markets in the
west and selling relatively income elastic products this is a potentially
lucrative market. It may also be a low cost base from which to produce
their products.
• e.g responses may point out that just because a country joins the WTO it
does not automatically attract MNCs. Neither does it necessarily mean
free trade; access to China is still heavily regulated by the authorities.
• e.g. candidate develops evaluation by perhaps discussing short and long
run situations. Cynics may question the efficacy of the WTO in achieving
its aims. More countries engaging in trade may actually mean more
competition for an MNC like Dell.
Sample question 3
• [6]
Answer question 3
Sample question 4
• [8]
Answer question 4
Sample question 5
• [6]
Answer question 5
Knowledge 2, Application 2, Analysis 2
Knowledge: up to 2 marks (one for each reason) for identifying
possible reasons. e.g. protecting infant or domestic industries,
retaliation, raise revenue from tariffs, distrust caused by recent
political conflicts, cultural damage
Application: up to 2 marks (one for each reason) for contextual
answers such as linking the above specifically to the countries of CEFTA
e.g. small (and in some cases new) countries, keen to grow and join
EU. e.g. Serbia has GDP growth rate of 1.5%.
Analysis: up to 2 marks (one for each reason) are for developing the
reasons e.g. giving infant industries the chance to grow big enough to
ensure future prosperity. Revenue from tariff can be used as
reinvestment in the infrastructure. Negative GDP growth in some
countries, e.g. Croatia (-1.5%) may increase reluctance to remove trade
barriers. If only one reason cap at 3 marks
Revision video - tariffs
Students don’t need to know how to draw the tariff graph but
instead understand how it works
Revision video - quotas
Students don’t need to know how to draw the quota graph but
instead understand how it works
Revision video – trade Blocs