Chapter 7: International Trade Policy

What is free trade?

The absence of barriers to the free flow of goods and services between countries

Why do nations restrict international free trade?

To protect politically important groups, support domestic producers, or for national security

What is the General Agreement on Tariffs and Trade (GATT)?

A world trade agreement aimed at promoting international trade by reducing trade barriers

What are tariffs?

Taxes on imports that raise the cost of imported products

What is the difference between specific tariffs and ad valorem tariffs?

Specific tariffs tax each unit of goods, and ad valorem taxes a proportion of the value of a good

What is an import quota?

A direct restriction on the quantity of goods imported into a country

What is a voluntary export restraint (VER)?

A quota on trade imposed by the exporting country from the importing country

What are subsidies?

When the government pays domestic producers

What is the purpose of subsidies?

To help domestic producers compete against low cost foreign imports and gain export markets

What is dumping in international trade?

Selling goods in a foreign market below their cost of production or below their fair market value

Name one political argument for government intervention in trade.

Protecting jobs and industries

What is the infant industry argument?

It suggests that an industry should be protected until it can develop and become competitive internationally

What is strategic trade policy?

A policy that aims to help domestic firms gain first-mover advantages in an industry

What is first mover advantage?

When you enter an industry early and get economic and strategic advantages

What did the Uruguay Round of negotiations emphasize?

Services, intellectual property, and agricultural subsidies.

What is one unresolved issue faced by the World Trade Organization (WTO)?

Protectionism in agriculture

What is the Doha Round aiming to achieve?

To cut tariffs, phase out agricultural subsidies, reduce barriers to investment, and limit antidumping laws.

How do antidumping policies protect domestic producers?

By punishing foreign firms that sell goods below fair market value

What economic argument supports trade intervention?

It boosts overall wealth of a nation to benefit both producers and consumers

What are local content requirements (LCR)?

Demand to produce a fraction of goods domestically

List political arguments for government intervention in trade.

Protects jobs and industries, national security, and helps achieve political objectives

Identify two implications for managers of developments in the world trading system.

Trade barriers can raise costs and influence firm strategies, while government interventions may affect competitiveness.

What is an export tariff?

a tax to export goods out of the country

What is an export ban?

A policy that restricts the export of a good to ensure supply in home country

What is a tariff rate quota?

A hybrid of a quotas and tariff, where a lower tariff is applied to imports within the quota than to those over the quota

What are administrative policies?

Rules designed to make is difficult for imports to enter country