Chapter 20 Flashcards
Most governments accept the proposition that a relatively ___ flow of international trade is desirable.
free
What is a tariff?
It is a tax that is applied on imports of goods or services
What are non-tariff barriers?
They are restrictions other than tariffs designed to reduce imports
What does free trade encourage all countries to do?
It encourages them to specialize in producing products in which they have a comparative advantage
What does world specialization maximize?
It maximizes world production and maximizes average world living standards
When does a country engage in trade protection?
When it implements government policy that interferes with free trade to protect domestic firms and workers from foreign competition
Why is diversification important?
It is important because, for a very small country, specializing in the production of only a few products might involve risks that the country does not want to take - technology may render the basic product obsolete, swings in world prices lead to large swings in national income
Social and distributional concerns my lead to the rational adoption of what kind of policies?
Protectionist policies
What is the cost of protectionist policies?
A reduction in the country’s average living standards
What can large countries do that small countries cannot in terms of improving their terms of trade?
They can levy tariffs on some imported goods in order to increase their national income
How can a country potentially increase its national income?
By protecting infant industries and by subsidizing “strategic” firms
How can the protection of infant industries and the subsidization of “strategic” firms backfire?
It can backfire as such policies can end up being redistribution from consumers and taxpayers to domestic firms, without any benefit to overall living standards
What are the 4 sample arguments frequently heard in political debates concerning international trade?
- Keep the money at home
- Protect against low-wage foreign labour
- Exports are good; imports are bad
- Create domestic jobs
What do tariffs do?
Imposes costs on domestic consumers
Generates benefits for domestic producers
Generates revenue for the government
What is the overall net effect of tariffs?
It is negative
What does a tariff generate for the economy?
A deadweight loss
A direct quantity restriction raises the ___ received by foreign suppliers of the good.
price
A tariff leaves the foreign suppliers’ ___ unchanged.
price
A ___ is worse than a tariff for the importing country.
quota
Which country prefers a quota? Which country prefers a tariff?
Exporting country prefers a quota
Importing country prefers a tariff
What were non-tariff barriers originally created to do?
They were originally created to remedy certain legitimate problems in trade
What is dumping?
It is a form of price discrimination
What can happen if dumping lasts indefinitely?
It can be a gift to the receiving country and also allows consumers to get goods from abroad at lower prices than they otherwise should
What were antidumping laws first designed to do?
To permit countries to respond to predatory pricing by foreign firms
What are antidumping laws used to do now?
To protect domestic firms against any foreign competition
What is a countervailing duty?
It is a tariff imposed by one country to offset the effects of specific subsidies provided by foreign governments.
Used to offset the effects of foreign export subsidies, but often they are thinly disguised protection.
What is the principle of GATT (General Agreement on Tariffs)
That each member country agreed not to make unilateral tariff increases
What replaced GATT?
The WTO (World Trade Organization)
What do regional agreements seek to do?
They seek to liberalize trade over a much smaller group of countries than the WTO membership.
What are the 3 standard forms of regional trade-liberalizing agreements?
Free trade areas
Customs unions
Common markets
What is a free trade area?
It is an agreements among two or more countries to abolish tariffs on trade among themselves while each remains free to set its own tariffs against other countries
What is a customs union?
It is a group of countries that agree to have free trade among themselves and a common set of barriers against imports from the rest of the world.
What is a common market?
It is a customs union with the added provision that labour and capital can move freely among the members.
What is a major effect of regional trade liberalization?
It is to alter the pattern of production and trade as countries reallocate their resources toward the production of goods in which they have a comparative advantage.
What is trade creation?
It is a 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.
What does trade creation represent?
It represents efficient specialization according to comparative advantage.
What is trade diversion?
It is a 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.
From the global perspective, what does trade diversion represent?
It represents an inefficient use of resources
What is the main argument against regional trade agreements?
The costs of trade diversion may outweigh the benefits of trade creation.
