Government Policy and International Trade

Question 1

free trade

Answer 1

occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country

Question 2

specific tariffs

Answer 2

: levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil)

Question 3

ad valorem tariffs

Answer 3

a proportion of the value of the imported good

Question 4

Impact of tariffs

Answer 4

• Increase government revenues
• Force consumers to pay more for certain imports
• Are pro-producer and anti-consumer
• Reduce the overall efficiency of the world economy

Question 5

instruments of trade policy (7)

Answer 5

1. Tariffs
2. Subsidies
3. Import Quotas and Voluntary Export Restraints
4. Export Tariffs and Bans
5. Local Content Requirements
6. Administrative Policies
7. Anti-dumping policies or countervailing duties

Question 6

subsidies

Answer 6

• Help domestic producers compete against foreign imports and gain export markets
  –> Ex. agriculture
• Domestic producers gain while consumers typically absorb the costs

Question 7

Import quotas

Answer 7

Usually enforced by issuing import licenses to a group of individuals or firms

Question 8

tariff rate quotas

Answer 8

Hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota

Question 9

voluntary export restraint (VER)

Answer 9

Can appease protectionist measures in a country

Question 10

quota rent

Answer 10

The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent

Question 11

export tariff

Answer 11

Goal is to discriminateagainstexporting in order to ensure that there is sufficient supply of a good within a country

Question 12

export ban

Answer 12

• Partially or entirely restricts the export of a good
  –> Ex. 1975 ban on U.S. crude oil exports

Question 13

local content requirements

Answer 13

• Requirement expressed in physical or value terms
• Protects domestic producers
• Consumers face higher prices

Question 14

administrative policies

Answer 14

• Bureaucratic rules designed to make it difficult for imports to enter a country.
  —> Japan’s car market has been hard for foreigners to crack. In 2016, only 6 percent of the 4.9 million cars sold in Japan were foreign, and only 1 percent were U.S. cars.
• Polices hurt consumers by limiting choice

Question 15

antidumping policies or countervailing duties

Answer 15

• Objective is to protect domestic producers from unfair foreign competition
• Domestic producer can file a petition with the Commerce Department and the International Trade Commission (ITC)

Question 16

dumping

Answer 16

• Enables firms to unload excess production in foreign markets
• May be result of predatory behavior
  –> Firms use low prices to drive competitors out and then raise prices and earn more profit

Question 17

What are the political arguments for government intervention? (6)

Answer 17

1. Protecting jobs and industries
2. Protecting national security
3. Retaliating
4. Protecting consumers
5. Furthering foreign policy objectives
6. Protecting human rights

Question 18

what are the economic arguments for government intervention (2)

Answer 18

1. infant industry argument
2. Strategic trade policy argument

Question 19

infant industry argument (and its criticisms)

Answer 19

• Support comes through tariffs, import quotas, subsidies
• Two criticisms
  1. Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient

2. Assumes firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market

Question 20

Strategic trade policy argument

Answer 20

• Government can help raise national income when a domestic firm gains first-mover advantages
• A government may intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages
• Both of these support government intervention in international trade.

Question 21

describe Krugman and Retaliation and trade war (revised case for free trade)

Answer 21

• Krugman – strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry boost national income at the expense of other countries

–> These policies will probably provoke retaliation
—> Help establish antidumping policies and rules that minimize trade-distorting subsidies

Question 22

domestic politics case for free trade

Answer 22

• Governments don’t always act in the national interest
• Interest groups may influence policy
• Krugman concludes that strategic trade policy is almost certain to be captured by special-interest groups which will distort it to their own ends

Question 23

strong economic arguments for unrestricted free trade –> development of current world trading system

Answer 23

• Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)