Government Policy and International Trade Flashcards
What are instruments of trade policy?
- Tariffs
- Subsides
- Import quotas
- Voluntary export restraints
- Local content requirements
- Administrative policies
- Antidumping duties
Tariffs
a tax levied on imports (or export).
- Is placed on imports to protect domestic producers from foreign competition by raising the
price of imported goods
- Government gains and domestic producers gain
- Consumers lose- have to pay more for certain imports
Specific tariffs
levied as a fixed charge for each unit of good imported ($3 per barrel of oil)
Ad valorem tariffs
as a proportion of the value of an imported good
Export tariff
a tax placed on the export of a good (relatively rare)
▪ The goal behind this is to ensure there is sufficient supply of a good within the country.
Subsidies
Government financial assistance to a domestic producer, fx cash grants, low-interest loans, tax breaks. Helps domestic producers in 2 ways:
1. Competing against foreign imports
2. Gaining export markets
- Helps domestic firms achieve a dominant position in those industries in which economies of
scale are important
- Can help achieve a first mover advantage in an emerging industry
Import quotas
a direct restriction on the quantity of a good that can be imported into a country. Issuing import licenses to group/individuals(firms- fx U.S has a quota in cheese imports, only firms allowed to import cheese are certain trading companies
Hybrid between tariff and quota Tariff rate quota: applied to imports within the quota than those over quota.
Voluntary export restraint (VER)
a quota on trade imposed from the exporting country’s side, instead of the importer’s usually imposed at the request of the importing country’s government.
Export ban
Is 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 either in physical terms, percent of component parts og value terms.
- Instead, the difference between the prices of imports and domestic goods gets averaged in the final price and is passed on to consumers.
o Example: Suppose that auto assembly firms are required to use 50% domestic parts. The cost of imported parts is $6000 and the cost of the same parts domestically is $10,000. Then the average cost of parts is $8000 (0.5 x $6000 + 0.5 x $10,000).
Administrative trade policies
typically adopted by government bureaucracies, that can be used to restrict imports or boost exports.
- To make it difficult for imports to enter a country
Antidumping policies
Dumping: selling goods in a foreign market for less than their cost of production or below their “fair” (profit margin) market value.
Designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition.
See model in IBunion notes (p.36)
Why is government intervention needed?
- Typically concerned with boosting the overall wealth of a nation, to benefit of all both
producers and consumers - The necessary for protecting jobs and industries from unfair foreign competition.
- National security
- Intervene in trade policy as a bargaining tool to help open foreign markets and force trading
partners to “play the rules of the game” - Protect consumers from unsafe products- American beef bc of cow disease.
- Protecting human rights
Economic arguments for intervention
Infant industry argument: New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with firms of developed nations
Strategic trade policy
An economic justification for government intervention in international trade
Strategic trade policy: Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market. Has 2 components:
1. A government can help raise national income, if it can ensure that a firm gain first-mocer advantages in an industry are domestic rather than foreign.
2. It might pay a government to intervene in an industry by helping domestic firms over barriers of entry created by foreign firms
- Support a rationale for government intervention in international trade
What is Porters diamond?
The determinants of national competitive advantage.
Factor endowments – a nation’s position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry
Demand conditions – the nature of home demand for the industry’s product or service
Related and supporting industries – the presence or absence of supplier industries and related industries that are internationally competitive
Firm Strategy, Structure, and Rivalry – the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry.
Absolute advantage
countries differ in their ability to produce goods efficiently. The theory suggests that a country should specialize in producing goods in areas where it has an absolute advantage and import where other countries have an absolute advantage.
Comparative advantage
makes sense for a country to specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries.
unrestricted free trade bring about increased world production-that is, that trade is a positive sum-game
opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Empirical evidence seems to be consistent with this claim.
Heckscher-Olin theory
pattern of international trade is determined by differences in factor endowments. Predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce.
Product life-cycle theory
trade patterns are influenced by where a new product is introduced. In an increasingly integrated global economy, the product life-cycle theory seems to be less predictive than it once was.
New trade theory
trade allows a nation to specialize in the production of certain goods, while buying goods that it does not produce from other nations that are similarly specialized. This mechanism -> variety of goods available to consumers in each nation is increased, while average costs of those goods should not fall.
industries where substantial economies of scale imply, the world market will profitably support only a few firms, countries may predominate in the export of certain products simply because they had a firm that was a first mover in that industry.
Some new trade theorists have promoted the idea of strategic trade policy. What is the argument?
that government, by the sophisticated and judicious use of subsidies, might be able to increase the chances of domestic firms becoming first movers in new industries.
Why are theories of international trade important to an individual business?
They can help the firm decide where to locate its various production activities
How can firms involved in international trade influence government policy toward trade?
By lobbying government, business firms can promote free trade or trade restrictions.
