Trade - trade policy Flashcards
what are the arguments in favour of trade
4
- greater market access
- increased production and scale economies - efficient allocation of resources
- imports = increase consumer welfare + access to cheaper inputs
- can contribute to economic growth by generating LR gains
what are the challenges of trade
- competitors on a world market harm exporters
- competition harms local producers
- imports might increase faster than exports = increase trade deficit
what are the different ways you can measure whether trade is good for growth
- what are 3 measurements of trade
- export led growth
- trade openness
- trade liberalisation
what is the export led growth trade measurement
- export/GDP as a measurement of competitiveness
- East Asian evidence = positive correlation between exports and growth
what is the trade openness measure of trade
- measured by trade volume
- [X + M]/GDP
- captures integration with world market - by looking at openness to imports as well as exports
- benefit of including imports = capture imported technology - which increases productivity = grow faster
- strong positive correlation between openness and growth
what is trade liberalisation measure of trade
- liberalisation of trade policies = reduces barriers to trade (tariffs)
- weak evidence linking growth with liberalisation
why are the motivations behind having protection and restricting trade
3
- revenue = trade taxes were main source of revenue for developing countries - especially since large informal sectors and low incomes
- infant industry
- political = instead of subsiding it is a cheap method to protect domestic firms = gains revenue
what is the infant industry argument
- competition prevents entrepreneurs from entering industries that could be profitable in the future because currently unprofitable
- limited period support - to allow the industry to grow before it opens up to competition
- but government has incentive to choose their friends the privledge
what are the key conditions needed for the infant industry argument
(justifies tariffs)
- the candidate will generate greater return than the cost of support
- must be profitable
- there is a market failure that will not support the establishment of the industry = incomplete capital markets
- tariffs - trade policy must be the best option
why would countries be enticed to liberalize trade
- policy learning = learn from successful neighbouring countries
- trade agreements
- mutually beneficial trade agreements WTO, RTA
- WTO supports implementation - donors
- can offset implementation costs and promote liberalisation - exporting firms
- benefit from competition - increase efficiency - more market access, cheaper imported inputs
1990 WTO
lots of trade reforms
- lots of people reduced their tariffs
what are the 2 methods of measuring trade policy
- NRP = nominal rate of protection
- INT = implicit nominal tariff
what is the NRP
nominal rate of protection
Why is it a bad measure
- the average of all scheduled tariffs
NRP - doesnt capture exemptions or evasion
what is INT
implicit nominal tariff
- the custom revenue (total tax collected) as a share of the value of imports
- allows for exemptions
what is the difference between INT and NRP
- NRP overestimates applied tariffs = average measure of gross protection on output - doesnt account for trade taxes on intermediate inputs
- INT = trade weighted - based on tariff revenue collected on the value of imports
