chapter 7 Flashcards
free trade
refers to a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country. Smith, Ricardo, and Heckscher-Ohlin’s theories predict that consequences include static and dynamic economic gains.
static economic gains
predicted consequence of free trade, because free trade supports a higher level of domestic consumption and more efficient utilisation of resources.
dynamic economic gains
predicted consequence of free trade, because free trade stimulates economic growth and the creation of wealth.
tariffs
the oldest and simplest instrument of trade policy. it is a tax levied on imports (or exports). they fall into two categories; specific tariffs or ad valorem tariffs.
specific tariffs
levied as a fixed charge for each unit of a good import.
ad valorem tariffs
levied as a proportion of the value of the imported goods.
export tariffs
less common than import tariffs. they usually have two objectives; (1) raise revenue for the government, (2) reduce exports from a sector, often for political reasons.
subsidy
a government payment to a domestic producer. it can take many forms, eg. cash grants, low-interest loans, and tax breaks. by lowering production costs, subsidies help domestic producers by (1) competing against foreign imports, and (2) gaining export markets. agriculture is one of the largest beneficiaries.
import quota
a direct restriction on the quantity of some goods that may be imported into a country. it is usually enforced by issuing import licenses to a group of individuals or firms.
tariff rate quota
a lower tariff rate is applied to imports within the quota than those over the quota. it is a common hybrid of a quota and a tariff.
voluntary export restraint (VER)
a quota on trade imposed by the exporting country, typically at the request of the importing country’s government. it benefits domestic producers as it limits import competition. it is a variant on the import quota.
quota rent
the extra profit that producers make when supply is artificially limited by an import quota.
export tariff
a tax placed on the export of a good. the goal is to discriminate against exporting in order to ensure that there is sufficient supply of goods within a country.
export ban
a policy that partially or entirely restricts the export of a good.
local content requirement (LCR)
a requirement that some specific fraction of a good be produced domestically. it can be expressed in physical or value terms. they have been widely used by developing countries to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture of component parts. it protects domestic producers, while consumer pay higher prices.
administrative policies
bureaucratic rules designed to make it difficult for imports to enter a country. they hurt consumers by limiting choice.
dumping
variously defined as selling goods in a foreign market at below their costs of production, or selling goods in a foreign market at below their “fair” market value as a way to unload excess production. difference is that fair market value is usually judged to be greater than the costs of producing because it includes a “fair” profit margin.
antidumping policies/countervailing duties
designed to punish foreign firms that engage in dumping. the objective to protect domestic producers from unfair foreign competition.
infant industry argument
the oldest economic argument for government intervention, proposed by Alexander Hamilton in 1792. many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries. to allow them to get a toehold, governments should temporarily support new industries with tariffs, import quotas, and subsidies, until they have grown strong enough to meet international competition.
strategic trade policy argument
two components; (1) a government can help raise national income by ensuring that firms that gain first-mover advantages are domestic. so, a government should subside promising firms in emerging industries, eg. the R&D grants to Boeing. (2) a government can intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms that have already reaped first-mover advantages, eg. Airbus, Boeing’s competitior.
Corn Laws
placed a high tariff on imports of foreign corn in Great Britain. the objective was to raise government revenue and protect British corn producers.
Smooth-Hawley tariff
aimed at avoiding rising unemployment in the US by protecting domestic industries and diverting consumer demand away from foreign products. it erected an enormous wall of tariff barriers and had a damaging effect on employment abroad. other countries reacted by raising their own tariff barriers. US exports thus declined and the world slid further into the Great Depression.
GATT
was established in 1947 under US leadership. it was a multilateral agreement whose objective was to liberalise trade by eliminating tariffs, subsidies and import quotas. it was superseded by the WTO and the tariff reduction was spread over eight rounds.
Uruguay Round
eighth round of negotiations to reduce tariffs in 1986. it was the most ambitious round yet. it extended rules to cover trade in services, protection of intellectual property, reduction of agricultural subsidies, and strengthening of the GATT’s monitoring and enforcement mechanisms. until then the rules only applied to trade in manufactured goods and commodities.
