Chap006 - Chapter 6 Chapter 6 The Political Economy of...

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Unformatted text preview: Chapter 6 Chapter 6 The Political Economy of International Trade 6-2 Introduction 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 6-3 Instruments of Trade Policy Question: How do governments intervene in international trade? There are seven main instruments of trade policy 1. Tariffs 2. Subsidies 3. Import quotas 4. Voluntary export restraints 5. Local content requirements 6. Antidumping policies 7. Administrative policies 6-4 Tariffs A tariff is a tax levied on imports that effectively raises the cost of imported products relative to domestic products Specific tariffs are levied as a fixed charge for each unit of a good imported Ad valorem tariffs are levied as a proportion of the value of the imported good 6-5 Tariffs Question: Why do governments impose tariffs? Tariffs increase government revenues provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods force consumers to pay more for certain imports So, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy 6-6 Subsidies A subsidy is a government payment to a domestic producer Subsidies help domestic producers compete against low-cost foreign imports gain export markets Consumers typically absorb the costs of subsidies 6-7 Import Quotas and Voluntary Export Restraints An import quota is a direct restriction on the quantity of some good that may be imported into a country Tariff rate quotas are 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 Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government A quota rent is the extra profit that producers make when supply is artificially limited by an import quota 6-8 Import Quotas and Voluntary Export Restraints Question: Who benefits from import quotas and voluntary export restraints? Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods for consumers 6-9 Local Content Requirements A local content requirement demands that some specific fraction of a good be produced domestically The requirement can be in physical terms or in value terms Local content requirements benefit domestic producers and jobs, but consumers face higher prices 6-10 Administrative Policies Administrative trade polices are bureaucratic rules that are designed to make it difficult for imports to enter a country These polices hurt consumers by denying access to possibly superior foreign products 6-11...
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This note was uploaded on 04/23/2011 for the course ECON 102 taught by Professor Econ during the Spring '11 term at Universitas Katolik Parahyangan.

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Chap006 - Chapter 6 Chapter 6 The Political Economy of...

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