Week 10 Lesson 1 Flashcards
What are the instruments of trade policy?
Definition:
Instruments of trade policy are tools governments use to influence trade flows, protect domestic industries, or promote exports.
Types of Instruments:
1. Tariffs: Taxes on imports.
- Specific Tariff: Fixed charge per unit.
- Ad Valorem Tariff: Percentage of the product’s value.
2. Import Quotas: Physical limits on the quantity of imports.
3. Export Subsidies: The government pays you to sell your product internationally (exporting it to other countries)
4. Voluntary Export Restraints (VERs): Export limits agreed upon by exporting countries. This is when a country that exports a lott agrees to limit the amount they export to other countries
5. Local Content Requirements: Governments reqe that a percentage of the supply chain happens domestically
6. Non-Tariff Barriers (NTBs): Administrative and technical barriers like safety standards.
Key Example:
The US imposing tariffs on steel imports to protect domestic steel producers.
Key Takeaway:
Trade policy instruments shape domestic markets, protect industries, and influence global trade dynamics.
What are tariffs, and how do they impact trade?
Definition:
A tariff is a tax imposed on imports, raising their price to protect domestic producers or generate revenue.
Effects of Tariffs:
- Consumers: Higher prices reduce consumer surplus.
- Producers: Domestic producers benefit from less competition.
- Government: Gains revenue from import taxes.
Small vs. Large Countries:
Small Countries:
- No impact on global prices, leads to welfare loss.
Large Countries:
- May improve terms of trade by reducing global import prices.
Key Example:
US steel tariffs raised domestic prices, protecting steelmakers but increasing costs for car manufacturers.
Key Takeaway:
Tariffs protect industries but reduce efficiency and may provoke retaliatory measures.
GIRLYPOP explanation:
Okay, babe, tariffs can feel like the least slay topic ever, but don’t worry—I’ll make it sparkle for you. Let’s turn this snoozefest into something you’ll get and slay on your exam. 💅✨
What Are Tariffs, Bestie?
A tariff is like the government saying, “You wanna bring your goods into my house? Pay up, sweetie.” 💰✨
- It’s a tax on imports, making foreign goods pricier so domestic producers can thrive.
- It also brings in some coin (aka revenue) for the government.
]The Tea on Tariffs: Who Wins and Who Loses?
- Consumers (Aka, Us Buying the Cute Stuff):
- Losers: Tariffs make imported goods more expensive, so we pay more. 😭
- Example: That fancy imported Italian handbag? Suddenly way pricier.
- Producers (The Domestic Heroes):
- Winners: Local producers slay because they face less competition from cheaper imports. 💪
- Example: US steelmakers loved tariffs on steel imports—it kept the competition out.
- Government (The Real Winner):
- Winners: They collect cash money from the tariffs. Cha-ching! 💵
Small vs. Large Countries—What’s the Deal?
- Small Countries:
- Imagine a tiny country putting tariffs on imports—it’s not gonna change global prices. 🥱
- All they get is welfare loss because consumers pay more, but the government doesn’t have enough pull to lower import prices globally.
- Large Countries:
- A big queen like the US can sometimes slay the game:
- By reducing global prices for imports (because of their buying power).
- But it still risks retaliation from other countries (trade drama incoming). 😬
- A big queen like the US can sometimes slay the game:
Key Example: US Steel Tariffs
- The US put tariffs on imported steel to protect domestic steelmakers.
- Result:
- Winners: US steelmakers thrived.
- Losers: US car manufacturers paid way more for steel, driving up costs.
Key Takeaway:
Tariffs are a government’s way of playing economic defense—protecting local industries while grabbing some extra cash. BUT they:
1. Mess with efficiency (because consumers pay more).
2. Spark trade drama (aka retaliatory tariffs).
What is the international equilibrium in trade?
Definition:
International equilibrium occurs when world import demand equals would export supply, determining trade volumes and prices globally
Mechanism:
- Import Demand Curve (MD): Downward-sloping, reflecting the quantity of imports demanded at various prices.
- Export Supply Curve (XS): Upward-sloping, showing quantities exporters supply at different prices.
Impact of Tariffs:
- A tariff shifts the import demand curve, reducing trade volume and raising domestic prices
Key Example:
Imposing a tariff on grain reduces imports, lowering global grain prices but increasing domestic ones.
Key Takeaway:
International equilibrium is disrupted by trade policies, altering trade flows and welfare.
What is the import demand curve, and why is it important?
What Is the Import Demand Curve?
- Imagine a country as a shopper looking to buy goods from abroad. The import demand curve shows how much the country wants to import at different price levels.
- High Prices: The country says, “Too expensive! I’ll make it myself.”
- Low Prices: The country goes, “OMG, that’s cheap—I’ll take a ton!”
Key Features (How It’s Made):
1. Derived from Domestic Supply and Demand:
- Demand Curve (D): How much the country’s people want to buy at various prices.
- Supply Curve (S): How much the country can produce itself at those prices.
- Import Demand = Demand (D) - Supply (S): The gap between what’s needed and what can be made locally is filled by imports.
2. Downward Sloping (Important Vibe):
- When prices fall, imports increase because it’s cheaper to buy goods from abroad.
What Happens When a Tariff is Added?
- A tariff (tax on imports) makes imported goods more expensive.
- Effect:
1. Higher prices = fewer imports (the shopper decides to buy less).
2. Domestic producers win because fewer imports = more local sales.
Why Is It Important?
- The import demand curve shows how trade policies like tariffs affect:
- Prices: How much consumers pay.
- Quantities: How much is imported vs. made locally.
- Market Equilibrium: The balance between imports and domestic goods shifts when trade policies are applied.
Key Takeaway (The Sparkle Moment):
- The import demand curve is the blueprint for understanding how tariffs and trade rules reshape who wins and loses in global markets.
What is the export supply curve, and what does it show?
Definition:
- The export supply curve shows how much of a product a country is willing to sell to other countries at various price levels.
Key Features:
1. How It’s Made:
- Export Supply = Domestic Supply - Domestic Demand
- It’s the leftover goods after the country satisfies its own needs.
2. Upward Sloping:
- At higher prices, producers are more motivated to sell abroad, so exports increase.
Impact of Export Policies:
1. Export Subsidies:
- Governments give subsidies (financial help) to encourage producers to export more.
- Effect: Increases exports but lowers global prices, which can hurt foreign competitors and distort trade.
Key Example:
- Steel Exports:
- When a country subsidizes steel exports, global steel supply increases, making steel cheaper worldwide.
Key Takeaway:
- The export supply curve is crucial for understanding how domestic and global markets interact. Export subsidies boost exports but can disrupt global trade and prices.
What are import quotas, and how do they differ from tarrifs?
Definition:
Import quotas set a fixed limit on the quantity of a product that can be imported.
Comparison with Tariffs:
Quotas restrict quantity, while tariffs increase prices.
Quota Rents: Financial benefits go to license holders under quotas.
Effects:
Prices rise due to limited supply.
Domestic producers benefit from higher prices.
Key Example:
The US sugar quota limits imports, keeping domestic sugar prices high.
Key Takeaway:
Quotas distort trade like tariffs but don’t generate government revenue.
What are export subsidies, and what are their effects?
Definition:
- Government payments to exporters, designed to increase global competitiveness and production.
Impacts:
1. Domestic Market:
- Higher producer surplus.
- Reduced consumer surplus as prices rise.
2. Global Market:
- Lower global prices harm foreign competitors.
- Inefficiency due to overproduction.
Key Example:
EU agricultural subsidies flood global markets, undercutting developing country farmers.
Key Takeaway:
Export subsidies benefit producers but distort global markets and hurt international trade.
GIRLYPOP:
What Are Export Subsidies, Queen?
- Imagine the government as a sugar daddy who says to exporters:
- “Here’s some extra cash, babe—go out there and sell more of your fabulous goods on the world stage!” 💵✨
- This is a government payment to encourage more exports, making domestic goods cheaper abroad and more competitive globally.
How Do Export Subsidies Affect Things?
1. Domestic Market: Home Turf Drama
- Winners: Producers
- Producers (e.g., farmers, manufacturers) get a big boost because they’re selling more thanks to the subsidies.
- This increases their surplus (profit, basically).
- Losers: Consumers
- With so much focus on exports, there’s less supply at home, and domestic prices go up, meaning consumers pay more. 💔
1. Global Market: The Bigger Picture Tea
- Winners: Domestic Producers
- They slay in the global market because subsidies make their goods cheaper and more competitive.
- Losers: Foreign Producers
- Foreign competitors struggle because they can’t match the subsidized prices.
- Example: EU agricultural subsidies make EU crops so cheap that they flood global markets, undercutting farmers in developing countries.
1. The Inefficiency Drama
- Overproduction:
- Producers make way more than needed, which wastes resources and distorts global trade.
- Lower global prices:
- Sounds cute, but it hurts economies in developing countries that rely on fair pricing for their goods.
Key Example (Real Housewives of Export Subsidies):
- The EU’s agricultural subsidies make European crops (like wheat and dairy) so cheap that they’re dumped on global markets.
- Farmers in developing countries can’t compete with these low prices, even if their products are just as good.
Key Takeaway (What You Need to Know):
- Export subsidies help domestic producers slay globally, but they:
- Hurt consumers at home.
- Distort global markets by undercutting foreign producers.
- Create inefficiencies by promoting overproduction.
What is the Carbon Adjustment Mechanism and how does it work?
Definition:
CBAM is a climate policy by the EU that applies carbon pricing to imports, ensuring imported goods face similar costs as domestic goods under the Emissions Trading System (ETS).
Purpose:
- Reduces carbon leakage (relocation of emissions-intensive production).
- Protects EU industries from unfair competition.
Key Example:
- Imports of steel, cement, and aluminum into the EU must comply with CBAM standards.
Key Takeaway:
CBAM aligns trade policy with climate goals but raises competitiveness concerns.
What are non-tariff barriers (NTBs) and why are they significant?
Definition:
- NTBs include administrative, technical, and regulatory measures that indirectly restrict trade.
Types:
1. Sanitary and Phytosanitary Standards (SPS): Rules ensuring food safety and health.
2. Technical Standards: Quality and safety requirements for imports.
3. Licensing Requirements: Administrative controls on trade.
Key Example:
- EU regulations on genetically modified organisms (GMOs) restrict US agricultural exports.
Key Takeaway:
NTBs address legitimate concerns but can act as hidden trade barriers.
GIRLYPOP:
What Are NTBs, Bestie?
- Non-Tariff Barriers (NTBs) are all the shady, indirect ways governments restrict trade without just slapping a tariff on it. Think of them as the fine print rules that make it harder for imports to strut their stuff in the domestic market. ✋✨
Types of NTBs (The Mean Girl Moves):
1. Sanitary and Phytosanitary Standards (SPS):
- These are rules to keep food and animals healthy. Sounds fair, right?
- But some governments take it too far, like saying, “Your imported cheese can’t sit with us because it doesn’t meet our safety standards.” 🧀✨
2. Technical Standards:
- Basically, “Your imported product needs to meet our perfectly impossible quality and safety requirements.”
- Example: A country might demand certain labels or packaging, adding extra work for exporters.
3. Licensing Requirements:
- Importers need a license to sell products, and these licenses are handed out like exclusive club memberships—hard to get and full of hoops to jump through.
Key Example (The EU vs. GMOs):
- The EU bans genetically modified organisms (GMOs) in food imports.
- Legitimate Reason: They say it’s about health and safety.
- Hidden Tea: It’s really about keeping local farmers competitive by blocking US agricultural exports.
Why Are NTBs Such a Big Deal?
- Legit Concerns: NTBs can be good when they address real issues like safety, health, and quality.
- Hidden Barriers: BUT sometimes, they’re just sneaky ways to block foreign competition and protect domestic producers.
Key Takeaway:
- NTBs = The sneaky, behind-the-scenes trade restrictions.
- They can slay when protecting health and safety but can also serve as hidden trade barriers, keeping competition out in shady ways.
How has Brexit reshaped UK-EU trade?
Definition:
- The UK-EU Trade and Cooperation Agreement (TCA) preserves tariff-free and quota-free trade but introduces significant non-tariff barriers (NTBs).
Impacts:
1. Zero Tariffs and Quotas:
- Tariff-free trade applies only to goods meeting specific rules of origin requirements.
2. Increased Export Costs:
- Customs checks, regulatory compliance, and additional paperwork increase costs and delays for exporters.
Key Example:
- UK fisheries experience significant challenges, such as delayed access to EU markets due to stricter customs and sanitary controls, harming perishable exports like seafood.
Key Takeaway:
While the TCA maintains tariff-free trade, the introduction of NTBs has created greater trade friction, increasing costs and reducing efficiency in UK-EU trade relations.
Voluntary Export Restraint
Definition:
A VER is like an import quota, but the exporting country imposes the limit instead of the importing country.
Key features:
1. Requested by Importing Country:
- Importing countries often request VERs to protect their domestic industries.
2. Economic Impact:
- Profits/Rents: Foreign governments or producers benefit by selling limited quantities at higher prices.
Key Takeaway:
VERs restrict supply but shift the economic benefits (rents) to foreign exporters.
Timeline of US-China Tariff Measures
Definition:
The US-China trade war saw escalating tariffs from 2018 to 2020, impacting global trade.
Key Events:
1. 2018:
- Initial tariffs of 8% imposed by both the US and China.
2. 2019-2020:
- Tariffs escalated to over 20% on certain goods during peak trade war periods.
- Phase One Agreement: Stabilized tariffs at 19.3% (US on Chinese exports) and 20.7% (China on US exports).
Key Takeaway:
The trade war significantly increased costs for exporters and shifted global supply chains.
Imports from China (2016-2022)
Definition:
US imports from China dropped significantly during the trade war but recovered slowly after.
Key Insights:
1. 2018 Impact:
- US tariffs on Chinese goods caused a sharp decline in imports from China.
2. Recovery Post-2020:
- Despite the tariffs, imports recovered due to high global demand and supply chain adjustments.
Key Takeaway:
US tariffs disrupted trade but failed to fully decouple supply chains from China.
Consumer Goods vs Intermediate Inputs (Linked to US-China tariff measures)
Definition:
- Tariffs were targeted primarily at intermediate goods and capital equipment, sparing most consumer goods.
Key Impacts:
1. Consumer Goods (e.g., phones, toys):
- Avoided tariffs to prevent price increases for consumers.
2. Intermediate Inputs:
- Tariffs raised costs for manufacturers reliant on Chinese components.
Challenges for firms:
1. Higher Costs:
- Increased input prices.
2. Supply Chain Adjustments:
- Firms had to establish new supplier relationships or pay tariffs to continue importing.
Key Takeaway:
Tariffs on intermediate goods pressured firms to reconfigure supply chains at significant costs.
Signs of Diversified Supply
Definition:
- Companies diversified production away from China in response to the trade war.
Examples:
- Samsung (2019): Shifted smartphone assembly to Vietnam and India.
- Apple: Began moving iPhone assembly to India.
- Game Consoles: Nintendo and Microsoft shifted assembly of Switch and Xbox to Vietnam.
Key Takeaway:
The trade war accelerated global supply chain diversification, reducing reliance on China.
