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Chap 6: 1. Instruments of Trade Policy

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42 views3 pages

Chap 6: 1. Instruments of Trade Policy

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Hoàng Triều
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Chap 6

Free Trade: refers to situationin which a government does not attempt to restrict what its
ctizens can buy from or sell to another country

1. Instruments of Trade Policy


- Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to
domestic products
+ Specific tariffs - levied as a fixed charge for each unit of a good imported
+ Ad valorem tariffs - levied as a proportion of the value of the imported good
- Subsidies - government payments to domestic producers
- Import quota is a direct restriction on the quantity of some good that may be imported into a country
+ Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within
the quota than to those over the quota

+ A quota rent - the extra profit that producers make when supply is artificially limited by an import
quota

- Voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the
request of the importing country’s government.

- Local Content Requirements - demand that some specific fraction of a good be produced domestically

- Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a
country

- Antidumping Policies – aka countervailing duties - designed to punish foreign firms that engage in
dumping and protect domestic producers from “unfair” foreign competition

2. Why Do Governments Intervene In Markets?


1. Political arguments - concerned with protecting the interests of certain groups within a
nation (normally producers), often at the expense of other groups (normally consumers)
- Protecting jobs - the most common political reason for trade restrictions
- Protect National Security - industries like aerospace or electronics are often protected
because they are deemed important for national security
- Retaliating to unfair foreign competition – when governments take, or threaten to take,
specific actions, other countries may remove trade barriers
- Protecting Consumers limit “unsafe” products
- Furthering the goals of foreign policy – preferential trade terms can be granted to countries that a
government wants to build strong relations with

- Protect Human Rights: Governments sometimes use trade policy to try to improve the human rights
policies of trading partners.

2. Economic arguments - concerned with boosting the overall wealth of a nation – benefits
both producers and consumers
- The infant industry argument - an industry should be protected until it can develop and be
viable and competitive internationally
- Strategic trade policy
+ First, it is argued that by appropriate actions, a government can help raise national income if it can
somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic
rather than foreign enterprises.

+ It might pay a government to intervene in an industry by helping domestic firms overcome the barriers
to entry created by foreign firms that have already reaped first-mover advantages

3. When Should Governments Avoid Using Trade Barriers?


RETALIATION AND TRADE WAR

Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant
position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense
of other countries. A country that attempts to use such policies will probably provoke retaliation. In
many cases, the resulting trade war between two or more interventionist governments will leave all
countries involved worse off than if a hands-off approach had been adopted in the first place.

DOMESTIC POLICIES

Krugman argues that since special interest groups can influence governments, strategic trade
policy is almost certain to be captured by such groups who will distort it to their own ends

Chap 8
Regional economic integration – agreements between countries in a geographic region to
reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of
production between each other

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