Trade Policy (Lecture #5)

Question 1

What are some questions to consider when thinking about trade policy?

Answer 1

• What is incentivizing each party?
• why influence trade?
• what could countries do to influence trade?

Question 2

Protectionism are policies that:

Answer 2

-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

Question 3

Why do governments intervene in trade (general)?

Answer 3

to achieve economic, social,

and political goals

Question 4

Officials enact what kind of policies?

Answer 4

those trade policies they feel will best protect their

nations and citizens—and perhaps their personal political longevity

Question 5

Even though trade is beneficial at the aggregate level, _________

Answer 5

certain sectors might suffer

Question 6

In protectionism, who are policy makers challenged by?

Answer 6

• conflicting objectives

- interest groups

Question 7

What are stakeholders, who do they include?

Answer 7

groups who have a vested interest

• workers
• suppliers
• owners
• local politicians

Question 8

Incremental gains across many products create greater societal gains, meaning what?

Answer 8

certian pockets of society might suffer

Question 9

Who are the “loudest” stakeholders?

Answer 9

those who are the most directly affected tend to be the loudest in voicing their concerns

Question 10

what does trade restriction changes bring about?

Answer 10

winners and loser among countries, companies, and workers

Question 11

gains to consumers from freer trade may come at the expense of what?

Answer 11

companies and workers

Question 12

what are the four main economic rationales as to why governments intervene in trade?

Answer 12

• fighting unemployment
• protecting infant industries
• developing an industrial base
• economic relationships with other countries

Question 13

Describe “fighting unemployment” as an rationale for why governments intervene in trade

Answer 13

•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;

Question 14

What kinds of policies might be more effective at fighting unemployment than intervening in trade?

Answer 14

– Fiscal and monetary policies

Question 15

What risks might come with import restrictions?

Answer 15

• 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

Question 16

Describe “protecing infant industries” as an rationale for why governments intervene in trade

Answer 16

-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

Question 17

What kinds of countries typically implement the protecting infant industries strategy?

Answer 17

developing countries use this argument as a rationale for implementing
protectionist policies

Question 18

what is a risk with implementing protectionist policies to protect infant industries?

Answer 18

production costs may never fall far enough to make an

industry competitive

Question 19

Describe “developing an industrial base” as a rationale for why governments intervene in trade

Answer 19

-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

Question 20

Why do countries promote industrialization?

Answer 20

– brings faster growth than agriculture
– brings in investment funds
– diversifies the economy
– creates growth in manufactured goods
– reduces imports and promotes exports

Question 21

Describe “economic relationships with other countries” as a rationale for why governments intervene in trade

Answer 21

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

Question 22

What is dumping?

Answer 22

involves exporting below cost or below home country prices, and to get foreign producers to lower their prices

Question 23

Why do goverments have to be careful when using trade restrictions to control prices?

Answer 23

– 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

Question 24

According to the optimum tariff theory, a foreign producer will _______ its prices if the importing
company places a tax on its products

Answer 24

lower

Question 25

Describe “maintaining essential industries” as a rationale for why governments intervene in trade

Answer 25

– 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

Question 26

Describe “promoting acceptable practices abroad” as a rationale for why governments intervene in trade

Answer 26

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

Question 27

Describe “maintaing or extending spheres of influence” as a rationale for why governments intervene in trade

Answer 27

• 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

Question 28

What is an example of maintaining or extending Spheres of Influence?

Answer 28

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

Question 29

Describe “preserving national culture” as a rationale for why governments intervene in trade

Answer 29

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

Question 30

What is an example of preserving national culture as a rationale for why govs intervene in trade?

Answer 30

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

Question 31

What are the to types of instruments of trade control?

Answer 31

1. Those that indirectly affect the amount traded by
   directly influencing prices of exports or imports
2. Those that directly limit the amount of a good that
   can be traded

Question 32

What are the two main direct price influencers of trade control?

Answer 32

tariffs and subsidies

Question 33

what are tariffs

Answer 33

a government levied tax on goods shipped internationally

Question 34

On what can tariffs be levied

Answer 34

– 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

Question 35

def. specific duty

Answer 35

When a country assesses a tariff on a per unit basis (per unit $ amount)

Question 36

def. ad valorem tariff

Answer 36

A tariff that is assessed as a percentage of the item’s value

Question 37

def. a compound duty

Answer 37

due when both a specific and an ad valorem tariff are assessed

Question 38

def. subsidies

Answer 38

Direct assistance to companies to make

them more competitive

Question 39

What are some other direct price influencers?

Answer 39

Aid and loans to help companies win contracts
• tied
• untied
– Customs valuation
– Other direct-price influences
• special fees and requirements

Question 40

What are tied aid and loans?

Answer 40

part of contract; aid tied to contract of a project

ex. infrastructure project in another country

Question 41

What are untied aid and loans?

Answer 41

giving loans, hoping to influence the other party to accept a project

Question 42

What is a customs valuation

Answer 42

changin how much the product is supposed to be worth

-a type of tariff, but could also be considered an extra charge