TRADE LIBERALIZATION-FREE TRADE

Free Trade

Complete lack of restrictions on international trade

Protectionist Policy

Policy used by government that restricted trade to protect domestic producers

Protectionism

Government policies that restrict international trade to help domestic industries. Implemented with the goal to improve economic activity within a domestic economy but can also for safety and quality concerns.

Tariffs

Excised tax imposed on imported goods

Tariffs

Imposed to obtain revenue or to protect domestic firms. Higher tariff than more trade restricted.

Revenue tariff

An import tax used to provide government revenue

Protective tariff

Tax meant to raise the price of an imported good in order to protect certain domestic industry

Ad valorem tariff

A tax on imports evaluated as a percentage of the value

Specific tariff

A tax on imports that is proportional to the number of units or items imported

Economic impact of tariffs:
Decline in consumption
Increased domestic production
Decline in imports
Tariff revenue

Import quota

A law that sets a fixed amount of imports which transfers that revenue to foreign producers

Import quota

A product might be imported regardless of high tariffs. Low imports quotas completely prohibits imports

Import quota

Specifies the maximum amount of commodity that may be imported in any period

Non-tariff barriers (NTB)

Includes anything from quotas to quality standard aimed at reducing the imports of foreign products
Licensing requirement that specifies unreasonable standards pertaining to product quality and safety or unnecessary bureaucratic red tape that is used to restrict imports

Voluntary Export Restriction (VER)

A trade barrier by which foreigh firms “voluntarily” limit the amount of their exports to particular country. To avoid stringent trade barriers of the importing country

Military self sufficiency argument

Protective tariffs are needed to preserve or strengthen industries that produce the material essential for national defense

Increased domestic Employment argument

Reducing imports will divert spending on other nation’s output to spending on domestic output

Job creation from imports

Shortcoming in this argument: Increased domestic Employment argument

Import restrictions alter the composition of employment. Little or no effects on the volume of production

Fallacy of composition

Shortcoming in this argument: Increased domestic Employment argument

A nation cannot succeed in restring imports while maintaining their exports

Possibility of retaliation

Shortcoming in this argument: Increased domestic Employment argument

Nations adversely affected by quotas and tariffs are likely to retaliate causing a “trade barrier war” that will choke off trade and make all nations worse off

Long-run feedback

Shortcoming in this argument: Increased domestic Employment argument

Forcing an excess of exports over imports can not succeed in raising domestic employment.

Diversification for stability argument

Highly specialized economy are dependent on international markets for their income. Tariff and quota protection are allegedly needed to enable greater industrial diversification

Infant Industry Argument

Protective tariffs are needed to slow new domestic industries to establish and develop themselves are efficient producers

Strategic Trade Policy

Contend that government should use the trade barriers to reduce the risk in investing in product development by domestic firms, particularly where advanced technologies are involved

Strategic Trade Policy

The protected firms can eventually dominate world market because of their lower costs. The outcome may be higher tariffs worldwide, reduction of world trade and loss of potential gains from technological advances

Protection against dumping Argument

Contends tariff are needed to protect domestic firms from “dumping” by foreign producers

Dumping

selling of excess goods in foreign market at a price below cost

Cheap foreign labor argument

Domestic firms and workers must be shielded from the ruinous competition of the countries where wages are low

Unilateral disarmament

The removal of trade barriers by one country without reciprocal action on the part of other countries

Multilateral negotiations

Involves simultaneous tariff reductions among any countries. GATT

GATT General Agreement on Tariffs and Trade

legal agreement minimizing barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations

Regional Trading Areas

NAFCA North American Free TRade Agreement

Managed trade

Actions of government agencies to affect trade by persuading firms to buy or sell larger or smaller quantities of goods in other countries

Voluntary Restraint Agreements (VRAs)

Managed trade:
A country’s self imposed government restrictions on export to a particular country. Can be done after quotas are set by president’s negotiation. Effects like quota.

Voluntary Restraint Agreements (VRAs)

Revenue will go to foreign firms rather than quota holder

Voluntary Import Expansion (VIE)

A government agreement to expand imports from a particular country. Agrees to have its firms expand their imports of foreign goods from another country