CH20 - Trade Policy

Question 1

What is free trade?

Answer 1

absence of any form of gvt interference w the free flow of international trade

Question 2

What is protectionism?

Answer 2

departure from free trade designed to protect domestic industries from foreign competition

Question 3

What are tariffs?

Answer 3

taxes imposed on importation of specific products, designed to raise the price of products paid by domestic consumers and thus making imported good less attractive

Question 4

What are non-tariff barriers (NTB)?

Answer 4

Restrictions other than tariffs designed to reduce imports, ie import quotas, customs procedures, …

Question 5

what are the 4 cases for free trade?

Answer 5

1. Encourages specialisation in products where country has a comparative advantage => maximisation of world production + avg world living standard (per capita GDP)
2. Generates real income gains for countries as a whole BUT doesnt nec improve income for every ind in a country
3. Tariffs lead to less incentive for domestic firms to innovate + adapt new protection measures, causing a widening in technology gap between domestic/foreign firms
4. Tariffs thus provide less and less protection

Question 6

what are the 5 cases for protection?

Answer 6

1. Promotes diversification
2. Protecting specific groups
3. Improving terms of trade
4. Protecting infant industries
5. Earning economic profits in foreign markets

Question 7

What are the risks in specializing?

Answer 7

Techno advances rendering basic product obsolete
Swings in world price lead to large swins in nat income

Question 8

What is the benefit of promoting diversification (protectionism)?

Answer 8

Overall nat income + employment is less volatile

Question 9

What is the factor endowment theory?

Answer 9

Part of protectionism theories
When trade is expanded because of a reduction in tariffs, Canada will tend to export goods made by its abundant skilled workers and import goods made by unskilled workers –> we look at comparative advantage then, raises avg living standards

Question 10

How can one protect infant industries?

Answer 10

New domestic industries w potential for economies of scale/learning by doing need to be protected from competition from established, low-income foreign producers so they can grow large enough to achieve costs as low as those of foreign producers
EX: China’s economy

Question 11

What are the issues with protecting infant industries?

Answer 11

1. Some never grow up
2. Can resist disappearance of protection although all econ of scales have been achieved
3. Political rather than economic problem - hard to remove barriers once they exist

Question 12

What happens when you buy foreign products?

Answer 12

When Canadian importers purchase Japanese goods - They (or their financial agents) buy Japanese yen and use them to pay the Japanese manufacturers.

They purchase the yen on the foreign-exchange market by giving up dollars to someone who wants to use them for expenditure in Canad

Question 13

What are 4 invalid arguments for protection?

Answer 13

1. Keep the money at home
2. Protect against low-wage foreign labour
3. Exports are good, imports are bad
4. Create domestic jobs

Question 14

What does standard of living depend on?

Answer 14

Level of consumption

Question 15

What is the effect of tariffs on domestic prices?

Answer 15

It raises the domestic price above world price by amount of the tariff, so imports fall => producers earn more at the benefit of domestic consumers

Question 16

How do domestic consumers lose to tariffs on certain goods?

Answer 16

1. They consume less of the product because its price rises
   = domestic producers gain

They pay a higher price for the amount they do consume
= extra amount goes to get

Question 17

What is a quota?

Answer 17

country sets a max quantity of some product that may be imported each year

Question 18

Do import quotas or tariffs impose a larger deadweight loss?

Answer 18

Import quotas impose larger deadweight losses on the importing country than do tariffs that lead to the same level of imports.

Question 19

What is dumping?

Answer 19

Selling a product in a foreign country at a lower price than in the domestic market, a form of price discrimination performed by firms w price-setting powers. Its consumers get goods from abroad at lower prices than they otherwise would.

Most gvt have anti-dumping policies to protect industries

Question 20

What is countervailing duty?

Answer 20

Tariff imposed by one country designed to offset the effects of specific subsidies provided by foreign gvt, to even playing field.
It can be used to offset the effects of foreign export subsidies, but often they are nothing more than thinly disguised protection.

Question 21

What are the 3 types of trade agreements?

Answer 21

1. Free-Trade arean (FTA)
2. Customs unions
3. Common markets

Question 22

What is a free-trade area? (FTA)

Answer 22

• allows for tariff-free trade among the member countries, but it leaves each member free to establish its own trade policy with respect to other countries
• Must agree on rules of origins to establish when a good is made in a member country + pass tariff-freely across boarder

Question 23

What is a custom union?

Answer 23

Free-trade area in which member countries agree to establish common trade policy w rest of the world

Question 24

What is a common market?

Answer 24

customs union that also has free movement of labour and capital among its members.
The European Union is by far the largest example of a common market.

Question 25

What does trade represent?

Answer 25

consequence of reduced trade barriers among a set of countries whereby trade within the group is increased and trade with the rest of the world remains roughly constant.

= efficient specialization according to comparative advantage.

Question 26

What does trade diversion represent? (from global perspective)

Answer 26

consequence of reduced trade barriers among a set of countries whereby trade within the group replaces trade that used to take place with countries outside the group.

= trade diversion represents an inefficient use of resources.

Question 27

Which actors prefer quota and who prefer tariffs?

Answer 27

Exporting countries prefer quotas
Importing countries prefer tariffs

Question 28

What is the main argument against regional trade agreements?

Answer 28

The costs of trade diversion may outweigh the benefits of trade creation

Question 29

What are the results of the NAFTA?

Answer 29

Industry restructured in the direction of greater export orientation in all three countries, and trade creation occurred.

• The flow of trade among the three countries increased markedly, but especially so between Canada and the United States.
• The volume of inter-industry trade also increased.
• The greatest potential for trade diversion is with Mexico, which competes in the Canadian and U.S. markets with a large number of products produced in other low-wage countries.