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a) Quotas are a physical limit on the amount of imports permitted to enter acountry.A benefit of putting a quota on imports is that it will lead to a fall in

imports. This will mean that there will be an improvement on the current

account as the quota will prevent a surge of imports. If there was no quota

then countries like Bangladesh and China would be able to freely export into

our countries at low prices which may not be possible for domestic firms to

operate at. As the quota is introduced it limits the imports and so we will

import less. This will mean that there will be a smaller deficit or a larger surplus

on the balance of payments which will mean an improvement in the current

account.

A second benefit of putting a quota on imports is that it would lead to an

increase in domestic production, making textile industries in developed

countries more able to compete with Chinas cheaper produce. This could

lead to an increase in employment which could then lead to an increase inconsumption and AD which is further increased by the positive multiplier

effect. America doesnt have any protection from Chinas textile industry and

as a result have lost 350,000 jobs between 2001 and 2004. If the quota was in

place then it would mean that there would be more demand for domestic

products, as there would be less choice from the restricted amount of

imported textiles and so the firms would have more revenue and therefore be

able to pay their staff and keep them at the business.

b) The first reason which suggests that protectionism against China may be agood idea is that people are arguing that China is keeping its currency at an

artificially low level and giving state subsidies. This means that Chinas exports

will look more appealing to foreign importers than that of any Western

exporters because it is cheaper. This is proving to be a big problem for

America as they believe that if protectionism isnt introduced that China will

destroy the American textile industry as China have an unfair competitive

advantage. So the introduction of quotas would limit the amount of Chinese

textiles allowed into the country so consumers would resort domestic

produce, allowing American firms to increase their output due to the lesscompetition.

However, the danger of protecting the American textiles industry is that in the

long run these firms will have no incentive to continue innovation or lower

prices due to the restricted competition. Therefore, once the quota is lifted

American firms wont be able to survive against the more efficient Chines

firms as they offer better consumer welfare with lower prices and better

quality.

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Secondly, many jobs are being lost because firms cant compete with

Chinas extremely low prices. The demand for domestically produced goods

is falling because consumers want to pay a lower price and so domestic firms

are taking less revenue and cant afford to employ their staff. It is estimated

that 350,000 jobs have been lost in Americas textile industry between 2001

and 2004. They also believe that the remaining 695,000 jobs will be lost if the

quotas are abolished. Europe employs 2.7million people in its textiles

industries. This number is likely to fall as Europes imports of Chinese textiles

and clothing has almost doubled between 2001 and 2003. This could lead to

a negative multiplier effect causing surrounding businesses to cut back

worsening the current account as consumers will buy cheaper imports due to

less purchasing power.However, jobs are being created in China due to their vertically integrated

supply chain and demand from the USA. This will cause a positive multiplier in

China enabling the country to become more prosperous and therefore in thelong run demand more Western products from the USA increasing USAs

exports and stimulating job demand in America improving the current

account.

c) One impact of a tariff is that there will be a reduction in imports and there willbe more demand for domestically produced goods. This will mean that there

is an increase in producer surplus leading to an increase in profits. These

profits could be invested into lowering costs in the long run. This could lead toeconomies of scale which would mean lower prices and an increase in

export trade.

However, there may not actually be a reduction in imports. If the demand for

the good is inelastic then an increase in price will cause demand to fall by a

lesser percentage change, this due to the domestic firm supplying poor

substitutes which results in consumers buying foreign textiles. The EU has a high

marginal propensity to import therefore; it is unlikely for the tariff to have any

real significant impact.

Another impact is a significant gain in tax revenue as many imports will still bedemanded by consumers due their brand loyalty. This then enables the

government to further subsidise other industries that are struggling against

foreign competition in a more subtle way so they are less likely to be

investigated by the WTO. Overall this will improve the current account as firms

become more competitive to be able to export at lower prices and achieve

greater output.

However, the use of tariffs on foreign imports is an overt measure of

protectionism. This is likely to cause retaliation prompting the foreign country

to impose tariffs of their own on EU exports, increasing the cost to EU exporters

which may have to be passed onto the consumer resulting higher prices and

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less demand. Therefore, the current account worsens for both countries as

their exports may significantly decrease.