© Council for Economic Education, New York, NY.
Geography: Focus on Economics, Lesson 6.
Despite the advantages of free trade, many nations impose limits on trade for a variety of reasons. The main types of trade restrictions are tariffs, quotas, embargoes, licensing requirements, standards, and subsidies.
Tariffs, taxes on imports, raise the price of imported goods, which increases the demand and price for the same goods produced by domestic suppliers. Revenues from tariffs are collected by the domestic government.
Quotas put a legal limit on the amount that can be imported, creating shortages which cause prices to rise. A quota benefits domestic producers in the same way a tariff does, but the additional money expended on foreign goods goes to the foreign producers, not the domestic government.
Embargoes prohibit trade with other nations. They bar a foreign nation's imports or ban exports to that nation or both.
Licenses may be required of importers of foreign goods so that imports can be restricted by limiting the number of licenses issued. Export licenses may be required in order to implement partial embargoes on trade with specific nations.
Standards are laws or regulations establishing health and safety standards for imported goods, frequently much stricter than those applied to domestically produced goods.
Subsidies are payments made by governments to their domestic producers to enable them to compete with foreign competitors. They are usually intended to be temporary, allowing domestic producers to acquire new technology or to survive a short-term problem, but they frequently linger on for many years. It is difficult to dislodge entrenched special interests. Taxpayers bear the costs of subsidy payments.
Trade restrictions limit world trade, diminish economic efficiency, reduce total production and employment, raise prices, and encourage retaliation. They benefit some domestic companies and their workers at the expense of foreign companies and workers, and domestic consumers. While subsidies benefit some domestic companies and workers in exporting industries, tariffs reduce exports. Tariffs shift resources and production from more effective to less effective producers. Arguments used to support trade restrictions include the infant industry argument and the national security or strategic industry argument.
- Licensing Requirements
- Standards (health and safety)
- Infant Industry
- Strategic Industry
- Terms of Trade
Content Standards and Benchmarks
National Standard Number: 1
Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others.
National Standard Number: 5
Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and usually among individuals or organizations in different nations.
National Standard Number: 6
When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.
National Standard Number: 17
Costs of government policies sometimes exceed benefits because of incentives facing voters, government officials, and government employees, actions by special interest groups, or persuing social goals other than economic efficiency.
All decisions involve opportunity costs; weighing the costs and the benefits associated with alternative choices constitutes effective economic decision making. Economic incentives are powerful motivating forces. Externalities exist when some of the costs or benefits associated with the production or consumption of a product "spill over" to third parties other than the direct producers and consumers of the product.
Students read a narrative describing various types of trade restrictions and their effects, engage in a circle debate about the imposition of a new tariff, evaluate the arguments in favor of and against the tariff, and apply the model described in the narrative to determine who will benefit and who will be hurt by the tariff.
Materials (click for copies)
One or two class periods.
- Distribute Activity 1 (see below), Trade Restrictions and Their Effects. Explain to the students that they will be using this information in a debate activity. Allow students time to read the narrative. You may want to let them do the reading at the end of the period the day before you have the debate or assign the reading as homework.
Explain to the students that they are going to take part in an activity designed to help them understand trade restrictions and their effects.
Review the content in Activity 1, Trade Restrictions and Their Effects, with the class. If you have students who find the reading in the activity difficult, you may want to go over it with them, a paragraph at a time.
Choose one student to be a recorder. Provide him or her with a transparency and a pen suitable for writing on it, or with a ditto master. Tell the recorder to copy the written statements after they have been announced.
Divide the remaining students into two groups. Each group will argue one side of the question, "Should a tariff be imposed?" Group A will take the side of some small athletic shoe manufacturers. These companies are the major industries in the towns where they are located. Their workers are skilled and dedicated and are paid above average wages. Now these companies are facing competition from foreign companies that produce less expensive athletic shoes. The local companies are asking for government help in the form of a tariff on all imported shoes. Group B opposes the tariff on shoes. Both groups should refer to Activity 1, Trade Restrictions and Their Effects, for the pros and cons of imposing a tariff or other trade restrictions.
The discussion will take the form of a circle debate. Have each side sit in a circle. The members of each group should look at each other, not at the members of the other group. Have one student sit between the two circles and act as a recorder.
Group A, the group arguing in favor of a tariff, should begin. The group has 1 1/2 minutes to write a one-sentence statement of its position. Then one person from Group A should address the statement to Group B. The recorder should write the statement on a transparency or a ditto master.
Group B then has 1 1/2 minutes to decide on a counter statement to Group A. Again, the recorder writes down the statement.
While Group B is deciding on its statement, members of Group A should be trying to guess what the statement will be. They also should be planning their own responses one or two turns ahead in the debate.
The debate continues, with each side offering reasons for its position, until one side convinces the other or until time runs out.
When the debate is finished, use the transparency or run off what was written by the recorder on the ditto master to help you discuss the debate and the issues.
Ask each student to write a paragraph that describes who will benefit and who will be hurt if the tariff on shoes is instituted. (Domestic owners and workers in the shoe industry will benefit. Local businesses in the towns where the shoe factories are located may also benefit. To the extent that foreign shoes are imported, the government imposing the tariff will obtain additional revenue. Foreign owners and workers in the shoe industry, and domestic consumers in the country imposing the tariff will be hurt. Because the purchase of imports decreases, foreigners will have less income to purchase exports from the country imposing the tariff.
This will hurt owners and workers in exporting industries. Domestic production of shoes will increase, prices of shoes will increase, and resources will be diverted from more efficient industries to the less efficient shoe industry.)
Ask students to think of an item that they often use that may have come from another country. Tell them to write a paragraph about how different types of trade restrictions might change or restrict their use of this product.
Divide students into groups of about five students each. Let each group choose an imported good for their group to work with. Tell students that each group member should take the role of either (1) a foreign producer of the product, (2) a domestic importer of the product, (3) a domestic consumer of the product, (4) a domestic producer of the same product, or (5) a worker in a domestic factory producing the same product. Have each member of the group write or tell (recorded on audiotape) how the passage of a trade restriction will affect her or his life.
- Students can research why export taxes are prohibited in the United States Constitution, determine who would benefit from such taxes, and what their impact would have been on the United States economy in 1790.
- Students can research and report on the General Agreement on Tariffs and Trade, concentrating on the eighth round of negotiations, which began in Uruguay in 1986. They should discuss what progress has been made toward eliminating trade barriers and domestic subsidies in agriculture, removing barriers to trade in services, ending restrictions on foreign economic investments, and establishing and enforcing patent, copyright, and trademark rights, so-called intellectual property rights, on an international basis.
- Students can research and report on recent actions of the United States that restricted international trade: the voluntary agreement reached with Japan in 1981 to limit the number of Japanese automobiles imported to the United States (the agreement expired in 1985 but was continued informally), the 1982 import quotas imposed on sugar, the 1982 voluntary agreement with the Common Market nations, which imposed a quota on their steel exports to the United States, and the 1990 law, passed by both houses of Congress but vetoed by President Reagan, that protected the U.S. textile industry. (It would be very instructive to read the debate to override the president's veto in the Congressional Record.)