Free trade
A situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country
Instruments of Trade Policy
Tariffs
subsidies
import quotas
voluntary export restraints
local content requirements
administrative policies
antidumping duties
Tariff
tax levied on imports (or exports)
Specific Tariffs
fixed charge for each unit of a good imported
Ad valorem tariffs
levied as a proportion of the value of the imported good
Who suffers and who gains on Tariffs
Government and domestic producers gain from tariffs at the cost of the domestic consumer
Downfalls of Import Tariffs
1. impose significant costs on consumes
2. import tariffs rduce the overall efficiency of the world economy. A protective tariff encourages domestic firms to produce products at home that, in theory could be produced more efficiently abroad.
Objectives of Export quotas
1. raise revenue for the government
2. reduce exports from a sector often for political reasons
Subsidy pg.199
government payment to a domestic producer. Helps domestic producers in two ways
1. Competing against foreign imports
2. gaining export markets
Agriculture largest receiver of subsidy's
Favors domestic producers whose international competitiveness is incre
import quota pg 199
#An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is normally enforced by issuing import licenses to a group of individuals or firms.
#direct restriction on the quantity of some good
How an import quota affects price
If a domestic industry lacks the capacity to meet demand, an import quota can raise prices for both the domestically produced and the imported good. This happened in the U.S. sugar industry, in which a tariff rate quota system has long limited the amount
Tariff Rate Quota pg 199
a lower tariff rate is applied to imports within the quota than those over the quota
Common in agriculture
Voluntary Export Restraint pg 200
#quota on trade imposed by the exporting country, typically at the request of the importing country's government. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. If a domestic
quota rent pg.200
extra profit that producers make when supply is artificially limited by an import quota.
Local Content Requirement pg.200
Requirement that some specific fraction of a good be produced domestically
Administrative Trade Policies pg.201
bureaucratic rules designed to make it difficult for imports to enter a country.
Antidumping policiespg 201
designed to punish foreign firms that engage in dumping. objective is to protect domestic producers from unfair foreign competition. Often called countervailing duties.
Political Arguments for interventionpg 203
Protecting Jobs and Industries
National Security
Retaliation
Protecting Consumers
Furthering foreign policy objectives
Protecting Human Rights
Retaliation
Governments should use the threat to intervene in trade policy as a bargaining tool to help pen foreign markets and force trading partners to play by the rules of the game. Risky Strategy a country that is being pressured may not back down and instead may
Protecting Consumers
Protect consumers from unsafe products
Furthering foreign policy objectives
Governments sometimes use trade policy to support their foreign policy objectives. A government may grant preferential trade policy with a country that it wants to establish a relationship with.
Protecting Human Rights
Protecting and promoting human rights in other countries is an important element of foreign policy for many democracies.
Economic Arguments for intervention
Infant industry Argument
Strategic Trade Policy
Political arguments
Protecting jobs and industries, protecting jobs deemed important for national security, retaliating to unfair foreign competition, protecting consumers from dangerous products, furthering the goals of foreign policy and protecting human rights
Why do Governments Intervene in Markets?
1. Political Arguments
* Illegit - concerned with protecting the interests of certian groups within a nation (normally producers), often at the expense of other groups (normally consumers)
2. Economic Arguments
* Legit - concerned with boosting the overal
What are the Political Arguments for Government Intervention?
1. Protecting Jobs
2. Protecting industries deemed important for national security
3. Retaliation for unfair foreign competition
4. Protecting consumers from "dangerous" products
5. Furthering the goals of foreign policy
6. Protecting the human rights of
What are the Economic Arguments for Government Intervention?
1. The infant industry argument
2. Strategic trade policy
Infant Industry Argument
developing countries have a potential comparative advantage in manufacturing , but new manufacturing industries cannot initially compete with established industries in developed countries. Two main reasons why this is not true
1. protection of manufacturi
Strategic Trade Policy
industries in which the existence of substantial economies of scale implies that the world market will profitably support only a few firms, countries may predominate in the export of certain products simply because they have firms that were able to captur
Smoot-Hawley Act pg.209
aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products that erected an enormous wall of tariff barriers.
Reasons for Rise of Protectionist Trends pg.209
1. economic success of Japan during that time strained the world trading system.
2. World Trading System was strained by the persistent trade deficit in the world's largest economy, the United States.
3. many countries found ways to get around GATT regula
Uruguay Round 8th round pg. 210
members sought to extend GATT rules to cover trade and services and to write rules governing protection of intellectual property.
WTO pg. 210
acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on services and the other on intellectual property. GATS & TRIPS
Future of WTO pg. 212-214
Antidumping Actions
Reduction of Protectionism in Agriculture
Protecting Intellectual Property
Market Access for Non agricultural Goods and Services
What is WTO focusing on?
Anti-dumping policies
Protectionism in agriculture
Protecting intellectual property
What are the central issues facing the WTO at the present time?
Four issues at the top of the agenda for the WTO are the increase in antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations, and continued high tariff rates on n
Policy Implications pg. 217
Most Economists would probably argue that the best interests of international business are served by a free trade stance, but not a laissez-faire stance. It is probably in the best long-run interests o the business community to encourage the government to
Explain how trade barriers affect a firm's strategy.
There are four main ways trade barriers affect a firm's strategy. First, tariffs raise the cost of exporting, putting the firm at a competitive disadvantage. Second, quotas may limit a firm's ability to serve a country from outside of that country. Third,