Trade and Capital Restrictions

Trade Restrictions

In many countries governments will impose trade restrictions that will restrict foreign companies from supplying goods to these countries. Below are the main reasons for imposition of trade restrictions.

  1. Protect new industries: The government may want to protect any new industry from competition till it grows to a certain level.
  2. National security: The government may want to protect industries that produce goods required for national security. It's crucial that such goods can be procured locally during crisis.
  3. Protect jobs: When you allow foreign players to enter in your country, it will lead to job loss. The government may want to protect its labor. However, economists do not support this reason because there will be more job creation in other industries and also the prices of the imported products will be cheaper.
  4. Protect domestic industries: Many domestic industries may use their political influence to protect themselves from foreign competition.
  5. Anti-dumping: Domestic producers may argue that foreign firms are exporting products below their cost in order to drive competitors to bankruptcy, with the intention of later raising prices.

Methods of Trade Restriction

Country may attempt to limit trade through the following policies:

  • Tariffs – Government levies taxes on imported products.
  • Quotas – Government imposes limitations on the amount of a product that can be imported
  • Voluntary Export Restraints – This is a case where trading partners mutually agree to limit the amount of a product that will be exported
  • Export subsidies: The governments may provide subsidies to companies that export certain goods.
  • Minimum domestic production: Government may impose requirement that certain percentage of goods must be domestic.

Effects of Trade Restriction

Trade restrictions have the following common impact:

  • Domestic price of the good increases
  • Quantity imported decreases
  • Quantity supplied domestically increases.
  • Domestic producers gain
  • Foreign exporters lose
  • Government gains (tariff revenue, import licenses, etc.)

All methods except quotas and tariffs will decrease national welfare. In a large country, tariffs and quotas can increase welfare under certain conditions.

Capital Restrictions

Some countries may restrict the flow of capital across borders. This can come in the form of:

  • Prohibiting or restricting foreign investment in a country or specific industries
  • Prohibiting or taxing income earned on foreign investments
  • Restrictions on repatriation of earnings of foreign entities

Capital restrictions decrease economic welfare, however they tend to help developing countries in the short-term.

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