A2 Economics and Business The purpose of tariffs, laws and import quotas

1. A2 Economics and BusinessThe purpose of tariffs, laws and import quotas By Mrs Hilton for revisionstation

2. Lesson objective • To be able to define tariffs, laws and import quotas • To be able to answer past paper questions on the topic

3. 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 provide.

4. Starter • In teams define: • Tariff 2. Import Quotas • What is the difference?

5. 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

6. 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)

7. Start to build a fact file on 1) tariffs and 2) quotas • http://www.businessstudiesonline.co.uk/AsA2BusinessStudies/TheoryNotes/Edexcel/Unit3/3_4_3/3_4_3.swf • Create a collaborative mindmap (risky) https://bubbl.us/ • Exporting: • http://www.bbc.co.uk/learningzone/clips/export-of-mange-tout/4505.html

8. Problems of Tariffs • http://www.bbc.co.uk/schools/gcsebitesize/history/mwh/usa/problems_video.shtml • Stop at the end of the world is at hand • A case to get rid of tariffs • http://www.bbc.co.uk/news/business-22649883

9. Goods and services do not flow completely freely among countries, even among those with excellent relations. Countries put up barriers to trade for a number of reasons. Sometimes it is to protect their own companies from foreign competition. Or it may be to protect consumers from dangerous or undesirable products. Or it may even be unintended, as can happen with complicated customs procedures. Tariff barriers have been reduced considerably over the past few decades but other obstacles remain. Getting rid of unnecessary trade barriers would give a great boost to global economic welfare. Discuss. Source OECD

10. Protectionism • 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.

11. Tariff • A Tax on traded goods (imported or exported) by governments • 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

12. Causes problems between countries

13. 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 custom union (such as the EU).

14. Trade barriers in the 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

15. 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.

16. 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 tariff. • 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 competitive.

17. Protectionism • http://www.youtube.com/watch?v=Y2X3KPilAt0&feature=related • Summarise arguments for and against protectionism • http://www.youtube.com/watch?v=GiZfi8uQo4Q&feature=related • Non-tariff barriers

18. Sample question 1 • Explain two likely reasons why India might impose high tariffs on imports such as cosmetics. [6]

19. 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 India and 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.