Chapter 7 - Govt Policy & Intl trade

Question 1

Free trade

Answer 1

When a government allows its citizens to buy and sell from/to another country

Question 2

7 main instruments of trade policies

Answer 2

tariffs, subsidies, import quotas, voluntary export restraints, local content requirement, administrative policies, anti-dumping duties

Question 3

tariffs

Answer 3

tax levied on imports/exports
pro-producer and anti-consumer
reduce efficiency of world economy: because encourages domestic firms to produce from home, even when its more efficient to produce abroad

Question 4

2 types of tariffs

Answer 4

1. Specific tariffs: fixed charge for for each unit of a good imported (3$ per barrel of oil)
2. Ad-valorem tariffs: as a proportion of value of the imported good

Question 5

2 objectives of export tariffs

Answer 5

1. raise revenue for the government

2. Reduce exports from a sector (usually for political reasons)

Question 6

Subsidies

Answer 6

A government payment to a domestic producer

i.e. cash grants, low interest loans, tax break

Question 7

By lowering production cost, subsidies help domestic producers

Answer 7

compete against foreign imports and gain export markets

Question 8

In favour of subsidies

Answer 8

1. advocates of strategic trade policy (domestic firms achieve dominant position + can help first mover advantage)
2. domestic producers (international competitiveness increases)

Question 9

In practice subsidies

Answer 9

tend to protect the inefficient and promote excess production

Question 10

Import quotas

Answer 10

A direct restriction on the quantity of a good that may be imported into a country: enforced with import licenses

Question 11

tariff rate quota

Answer 11

a lower tariff rate is applied to the quantity within the quota then that over it

Question 12

Voluntary export restraint (VER)

Answer 12

a quota on trades imposed by the exporting country, typically at the request of the importing country’s government. (varies with the import quota)

Question 13

foreign producers agree on VER because

Answer 13

they fear more punitive tariffs or import quotas might follow if not

Question 14

importing country government ask for VERs because

Answer 14

protect its domestic business that produce competing goods

Question 15

pros of VER

Answer 15

domestic producers face limited import competition

Question 16

cons of VER

Answer 16

it increases the price of the import goods

Question 17

quota rent

Answer 17

extra profit producers make when supply is artificially limited by an import quota –> less supply for demand so it bids the price up

Question 18

Export tariffs

Answer 18

tax placed on the export of a good

GOAL: discriminate against exporting so that there is sufficiently of that good within the country it is produced

Question 19

Export ban

Answer 19

a policy that partially or entirely restricts the export of a good

Question 20

local content requirements

Answer 20

a requirement that some specific fraction of a good be produced domestically

Question 21

Why local content requirements

Answer 21

1. protect local parts producers (just like import tariff/quota)
2. domestic producers benefit not consumers (but import price increase)
3. 75% of components part must be produced domestic r 75% of its value must be produced domestic

Question 22

Who uses local content requirements

Answer 22

developing countries: instead of only assembling products that the parts were produced elsewhere, they bring in the production there. Protects local jobs and industry from competition

Question 23

the buy america act

Answer 23

an example of local content requirement where 51% + must be produced domestically for a product to be american

Question 24

administrative trade policies

Answer 24

bureaucratic rules designed to make it hard for imports to enter a country (japan)

Question 25

anti-dumping policies

Answer 25

Designed to punish foreign firms that engage in dumping.

OBJECTIVE: Protect domestic producers from unfair foreign competition.

Question 26

dumping

Answer 26

selling surplus goods in a foreign market below the cost of production or below the “fair” market value

Question 27

dumping can be the result of predatory behaviour

Answer 27

Drive indigenous competitors out of that market by using profit from their home markets to subsidize prices in a foreign market.

Question 28

The case for government intervention

Answer 28

Political or economic

Question 29

Political intervention

Answer 29

concerned with protecting certain groups (producers) at the expense of others (usually consumers), achieving some political benefit not related to te economy

Question 30

Economic intervention

Answer 30

boosting overall wealth of a nation (to benefit producers and consumers)

Question 31

Political argument for intervention

Answer 31

1. protect jobs and industries
2. protecting national security
3. retaliating
4. protect consumers
5. further foreign policy objectives
6. protect human rights

Question 32

Protect jobs and industries

Answer 32

from unfair competition, but often overstated for political
1. Bush placed tariffs on imports of foreign steel as a response to “unfair competition”. The U.S steel producers that benefited from these tariffs were located in places were Bush need to win re-election in 2004.

Question 33

Protecting national security

Answer 33

Defense related industries, would be dangerous to import from foreign companies

Question 34

Retaliating

Answer 34

the government uses threats as bargaining tool to open foreign markets
May liberalize trade and result in economic gains
Risky: the country might answer by levying barriers of its own

Question 35

Protecting consumers

Answer 35

from unsafe products and indirect effect of limit or ban of imports

Question 36

further foreign policy objectives

Answer 36

use trade policy to enforce foreign policy
Government grant preferential trade terms to a country it wants to build strong relations with
Trade policy can be used to punish “rogue states”
Such pressure might persuade the rogue state to mend its ways, or it might hasten a change of government.

Question 37

Protecting Human rights

Answer 37

protect and promote human rights in other countries is key to foreign policy to many democracies

Question 38

Economic arguments for intervention

Answer 38

1. Infant industry

2. Strategy trade policy

Question 39

Infant industry

Answer 39

Alexander Hamilton (1792)
Developing countries have a comparative advantage in manufacturing, but cannot compete with established industries therefore: governments should temporarily help  new industries with tariffs, quotas, until they are strong to compete internationally.

Question 40

Strategic trade policy

Answer 40

government can raise national income when gains due to first mover advantage, can support them through subsidies. I.e. Boeing was granted R&D money from US government which gave it a substantial advantage

Question 41

Revised case for free trade

Answer 41

1. Retaliation and trade war: retaliation is temporary, it will not last, negotiation are more long term because you are convincing the other party that it is in both parties best interest to agree on the same thing
2. Domestic policies

Question 42

Retaliation Trade Policy

Answer 42

Krugman said: in a global industry is a beggar-thy neighbour policy that boosts national income at the expense of other countries–> will probably provoke retaliation

Question 43

Domestic policies

Answer 43

Governments dont always act in the nation’s best interest, interest groups could influence the policies, therefore strategic policy is almost certain to be used by interest groups

Question 44

Development of world trading system

Answer 44

Strong economic arguments for unrestricted free trade; some are scared to unilaterally lower barriers because they fear others will not do the same, although both nations agree they would both benefit.
SOLUTION: they must negotiate a set of rules to do it

Question 45

Timeline of globalization

Answer 45

Late 18th century: Adam Smith and ricardo
Smoot-Hawley Act: a wall of tariffs
1947-1979: GATT, trade liberalization and growth
1980-1993: protectionist trends and persistent trade deficit in US
1986-1996: Uruguay rounds to reduce tariffs

Question 46

Why trade to more protectionism

Answer 46

the rise of unemployment because imports were too high

Led to many countries finding ways around GATT with voluntary export restraints

Question 47

Trade deficit

Answer 47

import more than you export: not always bad

• -> encourages small businesses to grow
• -> if you import a lot, use it to benefit you financially
• ->Use of non-tariffs barriers is increasing (VREs)

Question 48

WTO

Answer 48

Created to implement the GATT agreement
Encompasses the GATT with Services and Intellectual Property and bring property law commonly international rules
The WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries.