International Trade

Question 1

Classic Trade theories

Answer 1

1. Mercantilism
   - Country is measured by its holding in gold and silver
   - Country’s goal is to enlarge these holdings
   - To do this a country must increase the difference between exports and imports
   - Problems
   - Confuses the acquisition of treasure with the acquisition of wealth
   - Weakens the country because it robs the individuals of the ability
   - Forces countries to produce products it would otherwise not to minimise imports
2. Absolute advantage
   - Free trade among countries as a means of enlarging wealth
   - Free trade enables a country to expand the amount of goods and services available to it by; specialising, trading
   - Limitations; assumes there is an absolute advantage balance among nations
3. Comparative advantage
   - Produce and export those goods and services for which it has relatively more productive than other countries
   - Import those goods and services for which other countries are relatively more productive than it is
   - You are better off specialising in what you relatively do best

Question 2

Issues on Trade Intervention

Answer 2

• Should a national government intervene to protect the country’s firms?
• Should a government directly help the countries domestic firms?
• What are the instruments used by the govs to impede upon free trade?

Question 3

Industry level arguments

Answer 3

1. National defence arguments
   - Country must be self sufficient in critical raw material, machinery, tech
2. Infant industry argument
   - Competitiveness and comparative advantage
3. Maintenance of existing jobs
   - Jobs in high wage countries threatened of those low wage countries
4. Strategic trade theory
   - What happens when countries do not gain from trade equally?
   - Protectionism policies to influence the growth of domestic firms

Question 4

National Trade Policies

Answer 4

Economic development programmes 
- Export promotion strategy 
- Import substitution strategy 
Industrial policy 
- Key domestic industries choses, protected and promoted 

Export promotion zones with specialist incentives set up to attract foreign investors in which imported materials undergo some degree of processing before being re-exported again

Question 5

Strategic trade argument for protection

Answer 5

• Can govs make informed, unbais choice between industries?
• Does anyone know which industry will be the most profitable in the future?
• What is other countries retaliate by protecting the same targeted industries?

Question 6

7 Instruments of Trade policy

Answer 6

1. Tariffs
2. Subsidies
   - Tax breaks
   - Low interest loans
   - Equity participation
   - Cash grants
3. Import quotas and VER
   - IQ direct restriction on the Q of a good that can be imported
   - VERS quota on trade imposed by the exporting country at the request of the import country
4. Local content requirements
   - A specific fraction of a good must be domestically produced
5. Admin Policies
   - Bureaucratic rules designed to make it difficult for imports to enter a county
   - Japanese master of rule
6. Antidumping policies
   - Prevents foreign firms imposing predatory pricing