Government Policy and International Trade Flashcards
(23 cards)
free trade
occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
specific tariffs
: levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil)
ad valorem tariffs
a proportion of the value of the imported good
Impact of tariffs
- Increase government revenues
- Force consumers to pay more for certain imports
- Are pro-producer and anti-consumer
- Reduce the overall efficiency of the world economy
instruments of trade policy (7)
- Tariffs
- Subsidies
- Import Quotas and Voluntary Export Restraints
- Export Tariffs and Bans
- Local Content Requirements
- Administrative Policies
- Anti-dumping policies or countervailing duties
subsidies
- Help domestic producers compete against foreign imports and gain export markets
–> Ex. agriculture - Domestic producers gain while consumers typically absorb the costs
Import quotas
Usually enforced by issuing import licenses to a group of individuals or firms
tariff rate quotas
Hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
voluntary export restraint (VER)
Can appease protectionist measures in a country
quota rent
The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent
export tariff
Goal is to discriminateagainstexporting in order to ensure that there is sufficient supply of a good within a country
export ban
- Partially or entirely restricts the export of a good
–> Ex. 1975 ban on U.S. crude oil exports
local content requirements
- Requirement expressed in physical or value terms
- Protects domestic producers
- Consumers face higher prices
administrative policies
- Bureaucratic rules designed to make it difficult for imports to enter a country.
—> Japan’s car market has been hard for foreigners to crack. In 2016, only 6 percent of the 4.9 million cars sold in Japan were foreign, and only 1 percent were U.S. cars. - Polices hurt consumers by limiting choice
antidumping policies or countervailing duties
- Objective is to protect domestic producers from unfair foreign competition
- Domestic producer can file a petition with the Commerce Department and the International Trade Commission (ITC)
dumping
- Enables firms to unload excess production in foreign markets
- May be result of predatory behavior
–> Firms use low prices to drive competitors out and then raise prices and earn more profit
What are the political arguments for government intervention? (6)
- Protecting jobs and industries
- Protecting national security
- Retaliating
- Protecting consumers
- Furthering foreign policy objectives
- Protecting human rights
what are the economic arguments for government intervention (2)
- infant industry argument
- Strategic trade policy argument
infant industry argument (and its criticisms)
- Support comes through tariffs, import quotas, subsidies
- Two criticisms
1. Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient
- Assumes firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market
Strategic trade policy argument
- Government can help raise national income when a domestic firm gains first-mover advantages
- A government may intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages
- Both of these support government intervention in international trade.
describe Krugman and Retaliation and trade war (revised case for free trade)
- Krugman – strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry boost national income at the expense of other countries
–> These policies will probably provoke retaliation
—> Help establish antidumping policies and rules that minimize trade-distorting subsidies
domestic politics case for free trade
- Governments don’t always act in the national interest
- Interest groups may influence policy
- Krugman concludes that strategic trade policy is almost certain to be captured by special-interest groups which will distort it to their own ends
strong economic arguments for unrestricted free trade –> development of current world trading system
- Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit
- General Agreement on Tariffs and Trade (GATT)
- World Trade Organization (WTO)
