Chap006 - Chapter 06 The Political Economy of International...

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Chapter 06 - The Political Economy of International Trade The Political Economy of International Trade INTRODUCTION A) This chapter explores the political reality of international trade. Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country. While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups. B) The major objective of this chapter is to describe how political realities have shaped, and continue to shape, the international trading system. INSTRUMENTS OF TRADE POLICY A) In this section, the text reviews seven main instruments of trade policy. These are: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, antidumping policies and administrative policies. Tariffs B) A tariff is a tax levied on imports (or exports) that effectively raises the cost of imported (or exported) products relative to domestic products. Specific tariffs are levied as a fixed charge for each unit of a good imported, while ad valorem tariffs are levied as a proportion of the value of the imported good. The important thing to understand about a tariff is who suffers and who gains. The government gains, because the tariff increases government revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers lose since they must pay more for certain imports. C) Thus, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy. Subsidies D) A subsidy is a government payment to a domestic producer. By lowering costs, subsidies help domestic producers in two ways: they help producers compete against low-cost foreign imports and they help producers gain export markets. However, many subsidies are not that successful at increasing the international competitiveness of domestic producers. Moreover, consumers typically absorb the costs of subsidies. Import Quotas and Voluntary Export Restraints E) An import quota is a direct restriction on the quantity of some good that may be imported into a country. A tariff rate quota is 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 voluntary export restraint is a quota on trade imposed by the exporting country, typically at the request of the importing country’s government. 6-1
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Chapter 06 - The Political Economy of International Trade F) While import quotas and voluntary export restraints benefit domestic producers by limiting import competition, they raise the prices of imported goods. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent . Local Content Requirements
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Chap006 - Chapter 06 The Political Economy of International...

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