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Unit V Trade Policy

Day and Date:

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Unit Highlights Free trade

Protection

Trade Barriers Tariffs Quotas

Subsidies

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Text book reference chapters International Economics by Dominick

Salvatore Chapter 8 & 9

International Economics by Francis

Cherunilam Chapter 9,10, & 28

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Let us recapitulate

International Trade Policy pertains to

government interference in the form ofrestrictions and regulations imposed on the

free movement of commodities, capital,

investment, and people across borders.

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Free Trade

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Free Trade - concept

Trade of commodities flows across

borders unhindered by government-imposed restrictions.

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Free Trade - Advantages

Specialization in core competencies

Economies of Scale

Efficient utilization of global resources Innovation Products and Processes

Greater variety at lower prices for customers

Inflow of foreign exchange Increase in employment, incomes, and

economic growth

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Free Trade - Disadvantages

Structural unemployment

Exposure to cross-border cyclicalfluctuations

Dumping

Threat to domestic industry

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ProtectionTrade Barriers

Import Tariffs

Import Quotas

Voluntary Export Restraints (VERs) Export Taxes

Export Subsidies

Voluntary Import Expansions (VIEs) Other Trade Policies

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Trade BarriersImport Quotas

Limitations on the quantity of goods that can

be imported into the country during a

specified period of time.

Two basic types of quotas:

Absolute quotas: limitations on the quantity ofimports during a specified period of time

Tariff-rate quotas:allow a specified quantity ofgoods to be imported at a reduced tariff rateduring the specified period

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Trade BarriersVoluntary

Export Restraints (VERs)

Restriction set by a government on the

quantity of goods that can be exported out ofa country during a specified period of time.

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Trade BarriersExport Taxes

A tax collected on exported commodities

Export taxes can be set on a specific or an

ad valorem basis.

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Trade BarriersExport

Subsidies

Payments made by the government to

encourage the export of specified products.

Subsidies can be levied on a specific or ad

valorem basis.

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Trade BarriersVoluntary

Import Expansions (VIEs

An agreement to increase the quantity of

imports of a product over a specified periodof time.

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Trade BarriersOther Trade

Policies

Government Procurement Policies

Health and Safety Standards

Red-Tape Barriers

Trade Sanctions

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Impact of tariffsa partial

equilibrium approach

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Impact of tariffsa partial

equilibrium approach

Consumption effect

Production effect

Trade effect

Revenue effect

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To conclude

The issue of free trade versus protectionism

has been one of the greatest internationaleconomic debates of all times.

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You should now be able to,

Describe and evaluate criticisms of Free

Trade. Understand the basis for trade barriers.

Use a partial equilibrium (supply and

demand) model to show graphically the

impact of a tariff.