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Chapter 3: Government Policy and International Trade (How Do Governments…
Chapter 3: Government Policy and International Trade
What Is The Political Reality
Of 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 another country
– many nations are nominally committed to free trade, but intervene to protect the interests of politically important groups
How Do Governments Intervene In
Markets?
Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products
― Specific tariffs - levied as a fixed charge for each unit of a good imported
― Ad valorem tariffs - levied as a proportion of the value of the imported good
what does it do
increase government revenues
• force consumers to pay more for certain imports
• are pro-producer and anti-consumer
• reduce the overall efficiency of the world economy
Subsidies - government payments to domestic
producers
Subsidies help domestic producers compete against low-cost foreign imports & gain export markets
– Consumers typically absorb the costs of subsidies
Import Quotas - restrict the quantity of some good
that may be imported into a country
– Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than
to those over the quota
A quota rent - the extra profit that producers make when supply is artificially limited by an import quota
Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government
benefit domestic producers
raise the prices of imported good
Local Content Requirements - demand that some specific fraction of a good be produced domestically
– benefit domestic producers
– consumers face higher prices
Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country
– polices hurt consumers by limiting choice
Antidumping Policies–also called countervailing duties–punish foreign firms that engage in dumping and 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
― may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices
Why Do Governments
Intervene In Markets?
Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
What Are The Political Arguments For
Government Intervention?
Protecting jobs - the most common political reason
for trade restrictions
– results from political pressures by unions or industries that are "threatened" by more efficient foreign producers and have more political clout than consumers
Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security
– aerospace or semiconductors
Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, to help open foreign markets, other countries may remove trade barriers
– if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
– risky strategy
Protecting consumers from “dangerous” products
limit “unsafe” products
Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with
– trade policy can also be used to punish rogue states
Protecting the human rights of individuals in exporting countries
through trade policy actions
Protecting the environment - international trade is associated with a decline in environmental quality
– concern over global warming
– enforcement of environmental regulations
Economic arguments - concerned with boosting the overall wealth of a nation - benefits both producers and consumers
What Are The Economic Arguments For Government Intervention?
1.The infant industry argument - an industry should be protected until it can develop and be viable and competitive internationally
– accepted as a justification for temporary trade restrictions under the WTO
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