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Chapter 3: Government Policy & International Trade (what are political…
Chapter 3: Government Policy & International Trade
free trade
many nations do not restrict what is bought or sold but intervene to protect interests of politically important groups
how do governments intervene
tariffs
specific = $5 for every 1kg
ad valorem = proportion of value of imported good
increase government revenues
force consumers to pay more for certain imports
pro-producer/ anti-consumer
reduce overall efficiency of world economy
subsidies
help domestic producers
compete against low cost markets
gain exports markets
import quotas
tariff rate quotas (lower tariff if within limit)
quota rent (profit is limited)
voluntary export restraints
benefit domestic producers
raise prices of imported goods
local content requirement
e.g. 35% of goods be done in SG
administrative policies
difficult for imports to enter country
antidumping policies
selling goods below cost of production to eliminate competition then later drive up prices
why do governments intervene in markets
political arguments - protecting interest of certain groups
economic arguments - to boost wealth of nation
what are political arguments for government intervention?
protecting jobs
protecting industries deemed important for security (aerospace)
retaliation for unfair foreign competition
protecting consumers from dangerous products
furthering goals of foreign policy (lax policy with favoured countries)
protecting human rights of individuals in exporting countries
protecting the environment
what are the economic arguments for government intervention?
infant industry
industry should be protected until it develops and becomes viable to survive on its own (compete internationally)
strategic trade policy
first mover advantage
overcome barriers to entries in industries where foreign firms are leading