Chapter 7 - Govt Policy & Intl trade Flashcards
Free trade
When a government allows its citizens to buy and sell from/to another country
7 main instruments of trade policies
tariffs, subsidies, import quotas, voluntary export restraints, local content requirement, administrative policies, anti-dumping duties
tariffs
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
2 types of tariffs
- Specific tariffs: fixed charge for for each unit of a good imported (3$ per barrel of oil)
- Ad-valorem tariffs: as a proportion of value of the imported good
2 objectives of export tariffs
- raise revenue for the government
2. Reduce exports from a sector (usually for political reasons)
Subsidies
A government payment to a domestic producer
i.e. cash grants, low interest loans, tax break
By lowering production cost, subsidies help domestic producers
compete against foreign imports and gain export markets
In favour of subsidies
- advocates of strategic trade policy (domestic firms achieve dominant position + can help first mover advantage)
- domestic producers (international competitiveness increases)
In practice subsidies
tend to protect the inefficient and promote excess production
Import quotas
A direct restriction on the quantity of a good that may be imported into a country: enforced with import licenses
tariff rate quota
a lower tariff rate is applied to the quantity within the quota then that over it
Voluntary export restraint (VER)
a quota on trades imposed by the exporting country, typically at the request of the importing country’s government. (varies with the import quota)
foreign producers agree on VER because
they fear more punitive tariffs or import quotas might follow if not
importing country government ask for VERs because
protect its domestic business that produce competing goods
pros of VER
domestic producers face limited import competition
cons of VER
it increases the price of the import goods
quota rent
extra profit producers make when supply is artificially limited by an import quota –> less supply for demand so it bids the price up
Export tariffs
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
Export ban
a policy that partially or entirely restricts the export of a good
local content requirements
a requirement that some specific fraction of a good be produced domestically
Why local content requirements
- protect local parts producers (just like import tariff/quota)
- domestic producers benefit not consumers (but import price increase)
- 75% of components part must be produced domestic r 75% of its value must be produced domestic
Who uses local content requirements
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
the buy america act
an example of local content requirement where 51% + must be produced domestically for a product to be american
administrative trade policies
bureaucratic rules designed to make it hard for imports to enter a country (japan)
anti-dumping policies
Designed to punish foreign firms that engage in dumping.
OBJECTIVE: Protect domestic producers from unfair foreign competition.
dumping
selling surplus goods in a foreign market below the cost of production or below the “fair” market value
dumping can be the result of predatory behaviour
Drive indigenous competitors out of that market by using profit from their home markets to subsidize prices in a foreign market.
The case for government intervention
Political or economic
Political intervention
concerned with protecting certain groups (producers) at the expense of others (usually consumers), achieving some political benefit not related to te economy
Economic intervention
boosting overall wealth of a nation (to benefit producers and consumers)
Political argument for intervention
- protect jobs and industries
- protecting national security
- retaliating
- protect consumers
- further foreign policy objectives
- protect human rights
Protect jobs and industries
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.
Protecting national security
Defense related industries, would be dangerous to import from foreign companies
Retaliating
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
Protecting consumers
from unsafe products and indirect effect of limit or ban of imports
further foreign policy objectives
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.
Protecting Human rights
protect and promote human rights in other countries is key to foreign policy to many democracies
Economic arguments for intervention
- Infant industry
2. Strategy trade policy
Infant industry
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.
Strategic trade policy
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
Revised case for free trade
- 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
- Domestic policies
Retaliation Trade Policy
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
Domestic policies
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
Development of world trading system
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
Timeline of globalization
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
Why trade to more protectionism
the rise of unemployment because imports were too high
Led to many countries finding ways around GATT with voluntary export restraints
Trade deficit
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)
WTO
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.
