International Trade Policies and Economic Integration: Key Concepts and Effects

tariff

a tax on importing a good or service into a country.

Consumption effect

The lost consumer surplus for those consumers squeezed out of the market when the domestic price rises above the world price

Production effect

The loss due to encouraging domestic production that has a resource cost greater than the world price (the world standard for efficient production)16

Monopsony power

nation has a large enough share of the world market for one of its imports that changes in the country's import buying can noticeably affect the world price of the product.

nontariff barrier

any policy used by the government to reduce imports, other than a simple tariff on imports.

Import quota

limit on the total quantity of imports of aproduct allowed into the country during a period of time (directly effects quantity)

gives government officials greater power as they can ensure the quantity of imports is strictly limited.

Voluntary export restraint(VER)

Quantitative limit on foreign exports (based on threat of import restriction) (directly effects quantity)

Tariff quota

Allows imports to enter the country at a low or zero tariff up to a specified quantity; imposes a higher tariff on imports above this quantity

-Directly effects quantity (if the tariff for potential imports above the specified quantity is so high that it is prohibitive, so that there are no imports above the specified quantity)

WTO

Succeeds and subsumes General Agreement on Tariffs and Trade

-Liberalize trade restrictions, move toward free trade• -Nondiscrimination among countries, most favored nation(MFN)•

-No unfair encouragement for exports

effective rate of protection (ch8/9)

Fixed favoritism

Resource-using application procedures

Domestic content requirements

"first-best" world

all private incentives are aligned with benefits and costs to society as a whole.

• supply and demand curves represent both private and social costs and benefits to society and all markets are perfectly competitive.

• free trade is economically efficient.4

Externality

spillover effect associated with production or consumption that extends to a third party outside the market (like a consequence)

The Specificity Rule

Infant Industry Argument

temporary tariff is justified because it cuts down on imports while the infant domestic industry learns how to produce at low enough costs.•

Eventually the domestic industry will be able to compete without the help of a tariff

Developing Government (Public Revenue) Argument

in poor, developing countries the import tariff becomes an important source of not just protection but also government revenue.

• The government revenue can be spent on otherwise underprovided public investments like education, health, and infrastructure

Dumping

occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market(or third-country markets), or at less than full production cost

Price-based dumping

when a firm sells a product in a foreign market at a price below that for which the firm sells the same product in the domestic market (international price discrimination as it favors buyers of exports)

Cost-based dumping

occurs when a firm sells the same good in a foreign market at a price below its average totalcost.3

Predatory dumping

A firm temporarily charges a low price in the foreign export market, with the purpose of driving its foreign competitors out of business

Cyclical dumping

Because of low demand, a firm tends to lower its price to limit the decline in quantity sold. During a recession with falling demand, the market price may fall below the average total cost but above the average variable cost (covering part of the fixed cost of production).The firm will continue to produce as long as price exceeds average variable cost.

Seasonal dumping

A firm exports excess inventories of a product. A price above the marginal cost of making the sale is sensible.

Persistent dumping

A firm with market power uses international price discrimination between domestic and foreign markets

export subsidy

Governments promote or subsidize exports more often than they restrict or tax exports.

• Controversial because it violates international norms about fair trade

Trade blocs

Each member country can import from other member countries freely, or at least with lower tariffs or nontariff barriers

Trade embargoes (trade blocks)

Some countries discriminate against certain other countries, usually because of a policy dispute.

They deny the outflow of goods, services, or assets to a particular country while allowing export to other countries,

discriminate against imports from the targeted country, or block both exports and imports from the target

Free-trade area

Members remove trade barriers among themselves but keep their separate national barriers against trade with the outside world

Customs union

Members remove barriers to trade among themselves and adopt a common set of external barriers

Common market:

Members allow full freedom of factor flows among themselves in addition to having a customs union

Economic union

Member countries unify all their economic policies, including monetary and fiscal policies as well as policies toward trade and factor migration

Trade creation

source of gains. It occurs whenever economic integration leads to an increase in the total volume of trade

Trade diversion

a source of losses. It occurs whenever there is a shift in product origin from a low-cost,nonmember exporter to a higher-cost, member country producer.