The document discusses international trade and restrictions on free trade. It begins by covering the history of the World Trade Organization (WTO), formed in 1995 to replace the General Agreement on Tariffs and Trade (GATT) and liberalize global trade. The WTO aims to administer trade agreements, facilitate negotiations, and handle disputes while promoting principles like non-discrimination and fair competition. The document then examines two common forms of trade protection: tariffs, which are taxes on imports, and quotas, which place limits on import quantities. Both result in higher domestic prices and production by inefficient domestic firms, hurting consumers but benefiting producers. They also reduce global economic efficiency and consumer surplus.

1. CHAPTER 13:INTERNATIONAL TRADE
13.3 THE WORLD TRADE ORGANIZATION (WTO)
13.4 RESTRICTIONS ON FREE TRADE: TRADE
PROTECTION

2. HISTORY OF THE WORLD TRADE ORGANISATION
(WTO) – JANUARY 1995, 124 COUNTRIES
© Hafiz Halwi 2014
• Suffering major declines in output and very high rates of
unemployment
• Resorted to tariffs and other restrictions to limit imports and protect
domestic production and unemployment
• Tariff wars – reduce the volume of international trade without
positive effects on output and employment
Great Depression of the
1930s
• Intended to gradually liberalise (free up) international trade and
prevent further outbreaks of tariff wars.
• Principles:
• Non-discrimination
• Elimination of non-tariff trade barriers
• Consultations to resolve trade disputes
General Agreement on
Tariffs and Trade (GATT)
– 1947, 29 countries

3. WTO – FUNCTIONS AND OBJECTIVES
Provides the institutional and legal framework
for the trading system that exists between
member nations worldwide
As of July 2011, it had 153 members, which
account for over 97% of global trade.
There are 31 ‘Observer countries’

4. WTO – FUNCTIONS AND OBJECTIVES
It administers WTO trade arguments
It provides a forum for trade negotiations
It handles trade disputes
It monitors national trade policies
It provides technical assistance and training for developing countries
It facilitates co-operation with other international organisations

5. The trading system promoted by the WTO is
based on the following principles:
Non-discrimination
Free trade
Predictability
Promotion of fair competition
Development and economic reform should be encouraged

6. RESTRICTIONS ON FREE TRADE:
TRADE PROTECTION

7. Free trade= the absence of government intervention of
any kind in the international trade
Trade protection= involves in government intervention in
international trade through the imposition of trade
restrictions (barriers) to prevent the free entry of
imports into a country or to protect the domestic
product from foreign competion.
FREE TRADE VERSUS PROTECTION

8. Definition: tariffs are taxes
on imported goods, and are
the most common form of
trade restriction (also
known as ‘customs duties’)
Purpose:
To protect a domestic
industry from foreign
competition (a protective
tariff)
to raise revenue for the
government (a revenue
tariff)
TARIFFS

10. Effect of
tariff: (must
draw graph)
Increase in
quantity
supplied,
decrease in
quantity
demanded
and decrease
in imports.
Domestic
consumers
are worse off
Domestic
producers
are better off
Domestic
employment
increase
The
government
gains tariff
revenues
- The
revenue that
government
gain from
tariff is
directly from
consumers.
(consumers
that paid the
tariff price)

11. Domestic income worsens.
-there is negative impact on
income distribution, because
tariff is a type of regressive tax
(tax rate decrease as the
income increase, less equal in
income distribution) which
burden the people on lower
income.
• Increase inefficiency in production
- The increase in domestic
output represents an increase
in production by relatively
inefficient domestic
producers/ waste of scarce
resources

12. Foreign producers
are worse off
They export a
smaller quantity for
the world price,
since the quantity
of import in the
importing county is
reduced.
Global
misallocation of
resources result
- Decrease in
consumption, shift
of production away
from more
effective foreign
producers to more
inefficient
domestic
producers.

13. Consumer surplus
is the area under
demand curve and
above the price
paid by consumers
(a+b)
The producer
surplus (c+g), also
the government
gains the revenue
equal to (e)
therefore, social
surplus after the
tariff is a
a+b+c+e+g
Area (d) and (f) are
welfare loss,
(d=inefficient
producer) &
(f=decrease in
consumer
consumption)
EFFECT OF TARIFF ON CONSUMER AND PRODUCER
SURPLUS (GRAPH 13.7(B))

14. Imports quota/quota= legal
limit to the quantity of a good
that can be imported over a
particular time period (usually a
year)
Similar to tariffs, except
that they usually do not
create revenue for the
government
When government set a
quota, it issues a limited
number of quota licenses
that determining the legal
limit on the quantity
imports.
This license holder gain quota
revenues/ quota rents
because whereas they buy
the good at the world price,
Pw, they sell to consumer at
the higher domestic price, Pq
IMPORTS QUOTAS

16. • Effect of an import quota: (same as tariff)
 Increase in quantity supplied, decrease in quantity demanded and decrease in imports
 Domestic consumers worse off
 Domestic producer better off
 Domestic employment increase
 The government neither gains or loses
-because there are no revenues generated from the implementation of quota
 Increase inefficiency in production
-(same as tariff)

17.  Domestic income distribution worsen
- Quota result in a higher price. Increase in price have the same effect as the tariff in that it
is regressive.
 Exporting countries may be worse off or better off.
-it depends on which is larger: the loss of export revenue or the gain of quota revenues
 Global misallocation of resources result
- Decrease in consumption, shift of production away from more effective foreign producers
to more inefficient domestic producers

18. • Consumer surplus is area a+b
• Producer surplus is area g+c
• Area d+f is welfare loss, (d=inefficient production) & (f= reduce consumption)
• Area e which represents quota revenue, is transfer abroad to exporting countries.
• The total surplus = d+e+f
• Quota result in greater welfare losses for domestic economy than tariff
EFFECT OF QUOTAS ON CONSUMER & PRODUCER
SURPLUS

19. FIN