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Government Policy & International Trade (How Do Governments Intervene…
Government Policy & International Trade
How Do Governments Intervene In Markets?
Tariffs
Taxes on imports that effectively raise the cost of imported products relative to domestic product
Ad valorem tariffs :<3:
Levied as a proportion of the value of the imported good
Specific tariffs :<3:
Levied as a fixed charge for each unit of a good imported
3) Are pro-producer & anti-consumer
4) Force consumers to pay more for certain imports
2) Reduce the overall efficiency of the world economy
1) Increase government revenues
Subsidies
Govt. payments to domestic producers
Help domestic producers
Gain export markets
Compete against low-cost foreign imports
Consumers typically absorb the costs of subsidies
Import Quotas
Restrict imported goods
Tariff rate quotas :<3:
Hybrid of a quota and a tariff
Lower tariff is applied to imports within the quota than to those over the quota
Quota rent :<3:
Extra profit that producers make when supply is artificially limited by an import quota
Voluntary Export Restraints
Trade quotas imposed by exporting country
(Requested by importing country)
Benefit domestic producers
Raise the prices of imported goods
Local Content Requirements
Some goods must be produced domestically
Consumers face higher prices
Benefit domestic producers
Administrative Policies
Bureaucratic rules designed to make it difficult for imports to enter a country
Hurt consumers by limiting choice
Antidumping Policies (aka Countervailing duties)
Punish foreign firms that engage in dumping
Protect domestic producers from “unfair” foreign competition
Dumping
Selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value
Enables firms to unload excess production in foreign markets
Why Do Governments Intervene In Markets?
Political Arguments
Protecting certain group's interest within a nation (normally producers), often at the expense of other groups (normally consumers)
1) Protecting jobs
2) Protect industries important for national security
E.g Aerospace / semiconductors
3) Retaliation for unfair foreign competition
4) Protecting consumers from “dangerous” products
5) Furthering the goals of foreign policy
Protecting the environment
International trade is associated with a decline in environmental quality
Concern over global warming
Enforcement of environmental regulations
Economic Arguments
Boosting nation's overall wealth - benefits both producers and consumers
1) Infant industry argument
Industry should be protected until it can develop and be viable and competitive internationally
2) Strategic trade policy
First-mover advantages can be important to success
Governments can help firms from their countries attain these advantages
Governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage