1. Why do countries restrict international trade?

Despite the costs to domestic consumers, countries frequently try to protect domestic producers by restricting international trade. Lobbying for trade restrictions is an example of the rent-seeking activities discussed in the chapter on government and public choice.

To help hide the special-interest nature of most trade restrictions, several arguments commonly are used. These include saving domestic jobs, creating fair trade, raising revenue through tariffs, protecting key defense industries, allowing new industries to become competitive, and giving increasing-returns-to-scale industries an advantage over foreign competitors.

2. How do countries restrict the entry of foreign goods and promote the export of domestic goods?

Tariffs, or taxes on products imported into the United States, protect domestic industries by raising the price of foreign goods. Quotas restrict the amount or value of a foreign product that may be imported; quantity quotas limit the amount of a good that may be imported, and value quotas limit the monetary value of a good that may be imported. Subsidies, payments made by the government to domestic firms, both encourage exports and make domestic products cheaper to foreign buyers.

3. What sorts of agreements do countries enter into to reduce barriers to international trade?

Groups of countries can establish free trade areas, where member countries have no trade barriers among themselves, or customs unions, where member countries not only abolish trade restrictions among themselves but also set common trade barriers on nonmembers. The United States, Mexico, and Canada established a free trade area in 1994.