Reasons for trade restrictions: reduce a deficit on the current account of the balance of payments

International Trade and Globalisation – Globalisation and Trade Restrictions

Why do countries restrict trade?

Countries sometimes put limits on imports to reduce a deficit on the current account of the balance of payments. Think of the current account as a bank account: if you spend more money (imports) than you earn (exports), you go into debt. Trade restrictions are a way to tighten the budget and bring the account back into balance.

• Protect domestic industries from foreign competition.
• Prevent a large current account deficit that could lead to debt problems.
• Encourage domestic production and employment.
• Maintain a stable exchange rate.

Analogy: The Current Account as a Bank Account

Imagine your country has a savings account called the Current Account (CA). The formula is:

$C_{A} = X - M$

Where X = exports and M = imports. If M > X, the account is negative (a deficit). Trade restrictions aim to reduce M or increase X so that the account moves toward zero or even positive.

Example: The UK Current Account 2023

The UK has a £100 bn deficit. If the government imposes a tariff on imported cars, the import volume might fall, helping to reduce the deficit.

How Trade Restrictions Reduce a Deficit

Trade restrictions such as tariffs, quotas, or import licensing can decrease imports (M) or boost exports (X). The result is a smaller negative value for $C_{A}$ or even a positive balance.

1. Introduce a tariff on a popular imported good.
2. Domestic producers gain a price advantage and increase their sales.
3. Import volume falls, reducing M.
4. The current account balance improves, moving toward a surplus.

Tariff Effect Example

A 10 % tariff reduces import volume by 20 % and the import value by £40 bn, helping to shrink the deficit.

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