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Chapter 7: Government Policy and International Trade (How do government…
Chapter 7: Government Policy and International Trade
Free Trade
Occurs when governments do not attempt to restrict what
citizens can buy from another country
, or
what they can sell to other countries
Why government intervene in markets?
Political argument
Protect Jobs
Protect industries deemed important for national security
Retaliation for unfair competition
Protecting consumers from "dangerous" products
Furthering goals of foreign policy
Protecting human rights of individuals in exporting countries
Protecting the environment
How do government intervene?
Subsidies
Government payments to domestic producers, Consumers typically absorb cost of subsidies
Help producers compete against low-cost foreign markets
Gain export markets
Cash grants, low interest loans, tax breaks, government equity participation
Import Quotas
Restrict quantity of some goods that may be imported into a country
Tariff rate quotas
: Hybrid of quota and tariff, lower tariff applied to imports within quota than over quota
Quota rent
: Extra profit that producers make when supply is artificially limited by import quota
Voluntary Export Restraints
Quotas on trade imposed by exporting country, at the request of importing country's agreement
Local Content Requirements
Demand that specific fraction of good be produced domestically
Benefit domestic producers, consumers face higher prices
Administrative Policies
Bureaucratic rules designed to make it difficult for imports to enter country
Limit choice for consumers
Antidummping policies
Punish foreign firms that engage in dunping, protect domestic producers from "unfair" foreign competition
Sell goods in foreign market at below fair market value, unload excess production in foreign market, predatory behaviour
Use profit from home market to subsidise prices in foreign market, drive out competitors, raise prices later
Tariffs
Ad valorem Tariffs
: Proportion of value of imported good
Specific Tariffs
: Fixed charge for each unit of imported good
Taxes levied on products, raise cost of imported products relative to domestic products
Reduce overall efficiency of world economy
Pro-producer, anti-consumer
Force consumers to pay more for certain imports
Increase government revenue
Benefit domestic producers, Raise prices of imported goods