Government Policy and International Trade

Question 1

What are instruments of trade policy?

Answer 1

• Tariffs
• Subsides
• Import quotas
• Voluntary export restraints
• Local content requirements
• Administrative policies
• Antidumping duties

Question 2

Tariffs

Answer 2

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

Question 3

Specific tariffs

Answer 3

levied as a fixed charge for each unit of good imported ($3 per barrel of oil)

Question 4

Ad valorem tariffs

Answer 4

as a proportion of the value of an imported good

Question 5

Export tariff

Answer 5

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.

Question 6

Subsidies

Answer 6

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

Question 7

Import quotas

Answer 7

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.

Question 8

Voluntary export restraint (VER)

Answer 8

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.

Question 9

Export ban

Answer 9

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

Question 10

Local content requirement (LCR)

Answer 10

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).

Question 11

Administrative trade policies

Answer 11

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

Question 12

Antidumping policies

Answer 12

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)

Question 13

Why is government intervention needed?

Answer 13

• 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

Question 14

Economic arguments for intervention

Answer 14

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

Question 15

Strategic trade policy

Answer 15

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

Question 16

What is Porters diamond?

Answer 16

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.

Question 17

Absolute advantage

Answer 17

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.

Question 18

Comparative advantage

Answer 18

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.

Question 19

Heckscher-Olin theory

Answer 19

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.

Question 20

Product life-cycle theory

Answer 20

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.

Question 21

New trade theory

Answer 21

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.

Question 22

Some new trade theorists have promoted the idea of strategic trade policy. What is the argument?

Answer 22

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.

Question 23

Why are theories of international trade important to an individual business?

Answer 23

They can help the firm decide where to locate its various production activities

Question 24

How can firms involved in international trade influence government policy toward trade?

Answer 24

By lobbying government, business firms can promote free trade or trade restrictions.