Chapter 07

Free Trade

A pattern of imports and exports that occurs in the absence of trade barriers.

Political Motives (Gov intervene in trade)

Reasons for government intervention in trade including protecting jobs, preserving national security, responding to unfair trade, and gaining influence.

Economic Motives (Gov intervene in trade)

Reasons for government intervention aimed at protecting infant industries and pursuing strategic trade policy.

Infant Industry Argument

The rationale that young industries need protection from international competition until they become competitive.

Strategic Trade Policy

Government attempts to affect the outcomes of strategic competition among companies in favor of domestic firms.

Cultural Motives

Reasons for government intervention to achieve cultural objectives and protect national identity.

Managed Trade

Government efforts to achieve trade objectives related to market shares or quantities of specific products.

Subsidy

Financial assistance to domestic producers, including cash payments, low-interest loans, tax breaks, and product price supports.

Export Assistance

Support provided by governments to domestic companies, including low-interest loans and loan guarantees to promote exports.

Foreign Trade Zones (FTZ)

Designated geographic regions where merchandise can pass with lower customs duties and fewer customs procedures.

Ex. Chinese when transitioned to more open economy

Trade-Promotion Agencies

Agencies that help small and medium-sized businesses with limited resources by organizing trips and opening trade offices.

Trade Restriction

Measures such as tariffs, quotas, embargoes, local content requirements, administrative delays, and currency controls used to limit trade.

Why do governments intervene in Trade

• Political Motives

• Economic Motives

• Cultural motives

Economic Motives (Gov interfere in Trade)

• Protect infant industries

• Pursue strategic trade policy

Instruments of Trade Promotion

• Managed Trade

• Subsidy

• Export Assistance

• Foreign Trade Zones

• Special Government Agencies

Instruments of Trade Restrictions

• Tariffs

• Quotas

• Embargoes

• Local Content Requirements

• Administrative Delays

• Currency Controls

Voluntary Trade Restriction (VTR)

Trade restrictions on the quantity of a good that an exporting country is allowed to export to another country