Trade Policy

Question 1

define ‘trade policy’

Answer 1

government policy affecting flow of goods and services between countries

Question 2

when was General Agreement on Tariffs and Trade (GATT) founded

Answer 2

1947

Question 3

how many countries are members of WTO

Answer 3

164

Question 4

members of WTO are subject to multilateral disciplines/trade rules. what are they?

Answer 4

1) transparency and fair trade

2) reciprocity
- if you lower tariffs to increase market access to other countries you expect the same in return

3) nondiscriminaton
- ‘most favoured nation’ principle

Question 5

examples of unilateral/bilateral/regional disciplines

Answer 5

unilateral - new zealand implemented non-reciprocated tariff reforms 2006

bilateral - australia-singapore trade agreement

regional - italy in EU and USA in NAFTA

Question 6

types of non-tariff barriers to trade

Answer 6

1) sanitary and phytosanitary standards (SPS)

2) technical barriers to trade (TBT)

3) pre-shipment inspection (PSI)

4) price controls

5) quantity controls

Question 7

two ways of measuring non-tariff barriers

Answer 7

1) frequency index
- meant to insure food safety

2) coverage ratio
- percentage of trade subject to non-tariff measures for importing country and provides measure of importance of non-tariff measures on overall imports

Question 8

describe tariffs

Answer 8

• tax on imports
• creates wedge between world price and domestic price
• distorts relative price between domestic and foreign goods

Question 9

modelling assumptions

Answer 9

1) importing country’s size
- ‘large’ country means it’s trade policy decisions affects world price

2) domestic market conditions
- assumes 1st market conditions which means no externalities and perfect competition
- assumes perfect substitutability between imported and domestic competing goods

3) scale of income and linkage effects
- associated with price changes of imported good
- partial (general) equilibrium appropriate where effects are small (large)

Question 10

assumptions of partial/general equilibrium analysis of a small country

Answer 10

1) full employment

2) first best conditions

3) trade balance
- country’s income = expenditure

Question 11

what is ‘lerner symmetry’

Answer 11

an ad valorem import tariff has same effect as export tax in general equilibrium under first best conditions

Question 12

what is ‘terms of trade’

Answer 12

difference between world price before tariff and new price after tariff, multiplied by imports

Question 13

when is a large importing country better off?

Answer 13

if terms of trade gain > deadweight loss

Question 14

how to calculate optimal tariff

Answer 14

1 / elasticity of foreign supply

Question 15

cases where quota welfare effect is equivalent to import tariff

Answer 15

1) allocation of quota licences to home firms/importers without rent seeking activities

2) auctioning of quota licences by government in competitive/efficient market context
- government revenue = tariff revenue of equivalent tariff
- net welfare effect = welfare effect of equivalent tariff

Question 16

cases where quota welfare is not equivalent to import tariff

Answer 16

1) allocation of quota licences with rent seeking activities to acquire licenses
- inefficient as using resources for political motives not matching consumer demand

2) importing country gives authority for implementing quota to exporting firms/government
- quota rents earned by foreign country

Question 17

three types of approach to estimate tariff equivalent non tariff barriers

Answer 17

1) direct price comparisons in protected domestic market and world price

2) implicit tariff equivalent revealed by value of bids at auctions for quota licences

3) inferred from econometrically estimate import demand functions

Question 18

what is a export subsidy

Answer 18

policy to encourage export of goods and discourage domestic sale of goods

Question 19

why do we want to remove export subsidies

Answer 19

they distort market prices, making them too high, in exporting countries and too low with less production in importing countries

Question 20

what is a production subsidy

Answer 20

subsidy to every unit produced
- will shift domestic supply curve down