Trade Policy (Lecture #5) Flashcards
What are some questions to consider when thinking about trade policy?
- What is incentivizing each party?
- why influence trade?
- what could countries do to influence trade?
Protectionism are policies that:
-affect the ability of foreign producers to compete in your home market
-– limit or enhance your company’s ability to sell abroad or acquire
needed foreign supplies
Why do governments intervene in trade (general)?
to achieve economic, social,
and political goals
Officials enact what kind of policies?
those trade policies they feel will best protect their
nations and citizens—and perhaps their personal political longevity
Even though trade is beneficial at the aggregate level, _________
certain sectors might suffer
In protectionism, who are policy makers challenged by?
- conflicting objectives
- interest groups
What are stakeholders, who do they include?
groups who have a vested interest
- workers
- suppliers
- owners
- local politicians
Incremental gains across many products create greater societal gains, meaning what?
certian pockets of society might suffer
Who are the “loudest” stakeholders?
those who are the most directly affected tend to be the loudest in voicing their concerns
what does trade restriction changes bring about?
winners and loser among countries, companies, and workers
gains to consumers from freer trade may come at the expense of what?
companies and workers
what are the four main economic rationales as to why governments intervene in trade?
- fighting unemployment
- protecting infant industries
- developing an industrial base
- economic relationships with other countries
Describe “fighting unemployment” as an rationale for why governments intervene in trade
•The unemployed are one of the most effective pressure groups for restrictions on imports
• But, trying to fix employment problems using trade policy can create new challenges
- costs that are often associated with import restrictions include higher prices and higher taxes;
•Governments must balance the potential for these costs with the benefits of creating new jobs;
What kinds of policies might be more effective at fighting unemployment than intervening in trade?
– Fiscal and monetary policies
What risks might come with import restrictions?
- can lead to retaliation by other countries “Trade Wars”
- are less likely retaliated against effectively by small economies
- are less likely to be met with retaliation if implemented by small economies
- may decrease export jobs because of price increases for components
- may decrease export jobs because of lower incomes abroad
Describe “protecing infant industries” as an rationale for why governments intervene in trade
-Alexander Hamilton presented idea (1792)
-holds that a government should temporarily shield emerging industries in which
the country may ultimately possess a comparative advantage from international
competition until its firms are able to effectively compete in world markets
– Government protection of import competition is necessary to help certain industries evolve
from high-cost to low-cost production
- production becomes more competitive over time because of increased economies of scale and greater work efficiency
– Therefore, if an emerging industry is protected during its infancy it has a greater chance for
success
What kinds of countries typically implement the protecting infant industries strategy?
developing countries use this argument as a rationale for implementing
protectionist policies
what is a risk with implementing protectionist policies to protect infant industries?
production costs may never fall far enough to make an
industry competitive
Describe “developing an industrial base” as a rationale for why governments intervene in trade
-countries trying to protect an important industry
• Countries that are trying to develop an industrial
base may intervene in trade flows
– Help to improve competitive positioning
Why do countries promote industrialization?
– brings faster growth than agriculture – brings in investment funds – diversifies the economy – creates growth in manufactured goods – reduces imports and promotes exports
Describe “economic relationships with other countries” as a rationale for why governments intervene in trade
Trade controls can be used – to improve the balance of payments – to gain fair access to foreign markets • comparable access argument – as a bargaining tool • believability and importance – to control prices • dumping (prevent it) • optimum-tariff theory
What is dumping?
involves exporting below cost or below home country prices, and to get foreign producers to lower their prices
Why do goverments have to be careful when using trade restrictions to control prices?
– If prices get too high, it could result in smuggling or substitution
– Similarly, if prices get too low, there is an incentive to produce less or to shift foreign production and sales
According to the optimum tariff theory, a foreign producer will _______ its prices if the importing
company places a tax on its products
lower
Describe “maintaining essential industries” as a rationale for why governments intervene in trade
– protect essential industries so the country is not dependent on
foreign supplies
• Countries must
– determine which industries are essential
– consider costs and alternatives
– consider political consequences
Describe “promoting acceptable practices abroad” as a rationale for why governments intervene in trade
Import trade controls can be used – to promote changes in foreign countries’ political policies or capabilities – as a foreign policy weapon – to pressure governments to alter their stances on a variety of issues • human rights • environmental protection
ex. Apartheid
Describe “maintaing or extending spheres of influence” as a rationale for why governments intervene in trade
- Governments provide assistance and encourage imports from countries that join a political alliance or vote a preferred way within international bodies
- A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not
What is an example of maintaining or extending Spheres of Influence?
Cotonou Agreement (The ACP-EU Partnership Agreement*)
• Signed in Cotonou on 23 June 2000
• Concluded for a 20-year period from 2000 to 2020
• It is the most comprehensive partnership agreement between developing
countries and the EU
– Since 2000, it has been the framework for EU’s relations with 79 countries from
Africa, the Caribbean and the Pacific (ACP)
– In 2010, ACP-EU cooperation has been adapted to new challenges such as climate
change, food security, regional integration, State fragility and aid effectiveness
Describe “preserving national culture” as a rationale for why governments intervene in trade
In order to preserve national culture, countries:
– limit foreign products and services in certain sectors
– prohibit exports of art and historical items deemed important
to national heritage
• Sustaining the collective identity that sets their citizens
apart from those in other nations, is another reason why countries intervene in trade flows
What is an example of preserving national culture as a rationale for why govs intervene in trade?
Rice imports were strictly limited for years in Japan for
example, because rice farming was considered to be a historically cohesive force in the country
What are the to types of instruments of trade control?
- Those that indirectly affect the amount traded by
directly influencing prices of exports or imports - Those that directly limit the amount of a good that
can be traded
What are the two main direct price influencers of trade control?
tariffs and subsidies
what are tariffs
a government levied tax on goods shipped internationally
On what can tariffs be levied
– on goods entering, leaving, or passing through a country – for protection or revenue – on a per unit basis or a value basis • export tariffs • transit tariffs • import tariffs
def. specific duty
When a country assesses a tariff on a per unit basis (per unit $ amount)
def. ad valorem tariff
A tariff that is assessed as a percentage of the item’s value
def. a compound duty
due when both a specific and an ad valorem tariff are assessed
def. subsidies
Direct assistance to companies to make
them more competitive
What are some other direct price influencers?
Aid and loans to help companies win contracts • tied • untied – Customs valuation – Other direct-price influences • special fees and requirements
What are tied aid and loans?
part of contract; aid tied to contract of a project
ex. infrastructure project in another country
What are untied aid and loans?
giving loans, hoping to influence the other party to accept a project
What is a customs valuation
changin how much the product is supposed to be worth
-a type of tariff, but could also be considered an extra charge
