1. Specific tariffs – This is a fixed dollar amount added per unit of the good (e.g., $3 per barrel of oil) 2. Ad valorem tariffs – This is a percentage of the total value of the goods you're importing. The more expensive the goods, the more you pay in tariffs.

WEEK 6 Flashcards by anna vandenappels

Free trade

No restrictions by government on imports or exports

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Theories by Smith, Ricardo, and Heckscher–Ohlin suggest free trade leads to

Static economic gains: better consumption, efficient resource use

Dynamic gains: economic growth, innovation, wealth creation

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Government use various tools to influence international trade

Tariffs

A tax on imports (sometimes exports) used to raise revenue or protect domestic producers.

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Two types of tariffs

Specific tariffs – This is a fixed dollar amount added per unit of the good (e.g., $3 per barrel of oil)
Ad valorem tariffs – This is a percentage of the total value of the goods you’re importing. The more expensive the goods, the more you pay in tariffs.

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Government use various tools to influence international trade

Tariffs
subsidies

A government payment (e.g., grants, tax breaks) to domestic producers to lower costs.

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Why are export tariffs used (even though they are less common)? (2)

To raise GOVERNMENT REVENUE
To discourage export of products needed for DOMESTIC USE

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What are the goals/effects of tariffs?

Raise government revenue
Protect domestic producers
Increase consumer prices
Risk of retaliation from trade partners

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What are the two main goals of subsidies?

Help firms compete with imports
Support exports by domestic firms

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What sector commonly receives subsidies?

Agriculture

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What is a tariff rate quota?

A hybrid of a quota and a tariff:

Low tariff within the quota
High tariff on quantities above the quota

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas

A direct restriction on the quantity of a good that can be imported, often controlled with licenses.

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas
Voluntary Export Restraint (VER)

A quota on exports set by the exporting country, usually at the importing country’s request.

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What is a quota rent?

Extra profit exporters earn due to supply restrictions created by VERs or import quotas.

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas
Voluntary Export Restraint (VER)
Export Tariffs and Bans

export tariff: A tax on goods leaving the country, often to ensure domestic supply.

export bans: A complete restriction on exporting certain goods, usually for security or supply reasons.

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas
Voluntary Export Restraint (VER)
Export Tariffs and Bans
Local Content Requirements (LCRs)

Policies requiring that a portion of a product be made domestically.

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How is local content measured?

Physical units (e.g., % of parts made locally)
Value (e.g., % of production value from local inputs)

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas
Voluntary Export Restraint (VER)
Export Tariffs and Bans
Local Content Requirements (LCRs)
administrative policies

Bureaucratic rules (e.g., slow customs, strict standards) that make importing more difficult and costly.

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Why are LCRs used?

To develop local industries, especially in developing countries.

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Government use various tools to influence international trade

Tariffs
subsidies
import quotas
Voluntary Export Restraint (VER)
Export Tariffs and Bans
Local Content Requirements (LCRs)
administrative policies
Antidumping Policies

Selling goods below production cost or fair market value (including a normal profit margin).

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What are antidumping measures?

Policies (like countervailing duties) to punish and prevent dumping, protecting domestic producers.

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What is the most common political reason for trade intervention?

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Protecting jobs and domestic industries from unfair foreign competition (like subsidized imports).

What are other political reasons for trade intervention?

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National security (e.g., defense, food supply)
Retaliation against unfair trade practices
Protecting consumers from harmful/unsafe imports
Promoting human rights or foreign policy (e.g., trade bans on oppressive regimes)

What is the Infant Industry Argument?

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The idea that new industries in developing countries need TEMPORARY PROTECTION (tariffs, subsidies, quotas) until they can compete globally.

What is the first part of Strategic Trade Policy?

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Governments can help domestic firms gain first-mover advantage in new, high-tech industries through support like subsidies (CREATE LEADERS)

What is the second part of Strategic Trade Policy?

Governments can support local firms in industries where foreign competitors already dominate, to level the playing field (HELP THE UNDERDOG)

What is Paul Krugman's main critique of strategic trade policy?

It can trigger retaliation (= FIGHTING BACK) from other countries, leading to trade wars that hurt everyone.

What happens when countries retaliate in trade policy?

They raise tariffs or restrict imports in response, causing a cycle of protectionism that reduces global trade and prosperity.

What is the argument in favor of hands-off (free trade) policies?

They help avoid trade conflicts, promote stability, and deliver better long-term outcomes for all countries.

What marked the start of trade liberalization in the UK?

The repeal of the Corn Laws in 1846, which removed high tariffs on grain.

What was the Smoot-Hawley Tariff (1930)?

A U.S. law that raised tariffs to protect jobs during the Great Depression.

What was the result of the Smoot-Hawley Tariff?

It backfired — other countries retaliated, global trade dropped, and the depression worsened.

What is GATT and when was it created?

General Agreement on Tariffs and Trade, created in 1947 under U.S. leadership to reduce trade barriers.

What were the goals of GATT?

Reduce tariffs, quotas, and subsidies to promote free trade.

Why did protectionist pressure increase in the 1980s?

Japan’s industrial success increased global competition U.S. trade deficit caused economic strain Countries found ways to evade GATT rules lead to: A pushback against free trade and increased protectionism.

What was the Uruguay Round and when did it start?

A major trade negotiation launched in 1986 to improve and expand trade rules.

What were the key outcomes of the Uruguay Round?

Cut industrial tariffs by over 1/3 Dropped average tariffs in developed countries below 4% Reduced agricultural subsidies Added rules for services, intellectual property (TRIPS), and dispute resolution Planned removal of textile trade barriers Created the World Trade Organization (WTO)

What does the WTO do?

Enforces trade agreements Resolves trade disputes Promotes transparency in global trade

What are GATS and TRIPS?

1. GATS = General Agreement on Trade in Services 2. TRIPS = Trade-Related Aspects of Intellectual Property Rights

What is a multilateral trade agreement?

A trade deal between three or more countries (e.g., WTO agreements).

What is a bilateral trade agreement?

A trade deal between two countries.

Are multilateral and bilateral deals allowed under WTO rules?

Yes — but they must be reported to the WTO.

How do tariffs affect a company’s export strategy?

They increase export costs, so firms might move production into the target country to avoid tariffs.

What effect do import quotas have on firms?

Quotas limit how much can be sold in a country, so firms may build local factories to stay in the market.

How can firms influence trade policy?

By lobbying governments to create laws that benefit them (either free trade or protectionist).

Why would firms support free trade?

To lower costs and make it easier to operate in global markets.

Protectionism

Government policies that make it harder or more expensive for foreign companies to sell in your country

Why would firms support protectionism?

To block foreign competitors and protect their market.

How does trade policy affect business decisions?

It shapes: Where to invest Where to produce Global expansion strategy

Do firms benefit more from free trade or protectionism?

Usually more from free trade, because it gives access to bigger markets and investment opportunities.

Hamilton

enfant industry: Some developing countries have the potential to become good at manufacturing (like making cars, electronics, etc.). BUT... Their new factories and industries are still small and weak, so they can’t compete yet with big, established companies in rich countries like the U.S., Germany, or Japan so need government intervention

WEEK 6 Flashcards

(51 cards)