Ch 20 - International Trade

Countries vary greatly in their efficiency in producing certain goods because of difference in such factors as the following

1, Climatic and geographical conditions 2. Human capacity 3. Supply and type of capital accumulation 4. Proportions of resources 5. Political and social climates

Advocates of trade barriers advance three basic arguments in favor of protectionism:

1. Reducing imports protects domestic jobs 2. Certain industries are essential to national security 3. Industries need protection in the early stage of development

Protectionism takes many forms:

1. Tariffs 2. Import quotas 3. Domestic content rules 4. Voluntary export restrictions 5. Trigger price mechanisms 6. Antidumping rules 7. Exchange controls 8. Export subsidies 9. Special tax benefits 10. Export licensing 11. Expropriation of assets of foreign entities. - the greatest political risk of doing business abroad.

The economic effects of tariffs and quotas can be summaries as follows:

1. Workers are shifted from relatively efficient export industries to less efficient 2. The excess paid by the customer for an imported good goes into the government treasure where it can be spent for any purpose. 3. A tariff is imposed on all importer equally, thus the more efficient ones will still be able to set their prices lower than the less efficient ones. 4. An import quota does not affect foreign importers equally and licenses may be assigned due to political favoritism.

Trade restrictions such as tariffs and import quotas represent

A subsidy paid by domestic consumers to domestic producers of the duty-burdened commodities. Trade restrictions are designed to protect domestic industries that cannot effectively meet foreign competition. Tariffs and quotas therefore cause consumers to pay higher prices and to consume fewer goods and services. In effect, consumers pay a subsidy to domestic producers. The long-term results are a reduction in trade and misallocation of resources to less efficient industries.

The appropriate remedy for the dumping of products by a foreign firm in the U.S. market would be to

Impose countervailing duties or tariffs. Dumping is the practice of supporting exports by selling products at a lower price in foreign markets than in the domestic market. The result is that foreign goods (such as certain items produced in the Far East) can be purchased in the U.S. at a price much lower than would be charged by a U.S. manufacturer. Since dumping lowers the price of foreign goods, the appropriate remedy would be for the importing nation to impose a tariff that would reduce the price differential.

A major effect of import quotas is to ...

Improve the balance of payments in the short run. Import quotas set fixed limits on particular imported products, e.g., French wine. In the short run, import quotas will help a country's balance of payments position by increasing domestic employment, but the prices of the products produced will also increase.

What is the best justification for reducing trade barriers among nations?

Increased total world output. The general effect of free trade would be to maximize world output because resources in each country would be deployed most efficiently according to the principle of comparative advantage.

If a country uses trade quotas to overcome chronic trade deficits, what would the most likely outcome be?

Unemployment and productivity rates will decline. With trade quotas, home jobs will be saved; hence, unemployment will decline. Since jobs will be saved for inefficient industries (less efficient than foreign competitors), productivity rates will decline because they will not be specializing in those goods with which they have a comparative advantage.

Protectionism is

any measure taken by a government to protect domestic producers.

A trigger price mechanism

automatically imposes a tariff barrier against unfairly cheap imports by levying a duty (tariff) on all imports below a particular reference price (the price that "triggers" the tariff).

Comparative Advantage is

based on the principle of relative opportunity costs. A country has a comparative advantage in the production of a good when it has a lower opportunity cost than another producer. That is, it has to sacrifice fewer units of another good to generate an additional unit of the first good. In theory, a nation exports goods in which it enjoys a comparative advantage and imports goods in which it has a comparative disadvantage.

Tariffs are

consumption taxes designed to restrict imports. Governments raise tariffs to discourage consumption of imported products.

The greatest advantage from trade is obtained when...

each nation specializes in producing what it can produce most efficiently, or more precisely, least inefficiently.

Net imports is

if imports exceeds exports

Domestic content rules

require that at least a portion of any imported product be constructed from parts manufactured in the importing nation. This rule is sometimes used by capital-intensive nations. Parts can be produced using idle capacity and then sent to a labor-intensive country for final assembly.

Net exports is

the amount of a country's exports minus its imports

The exchange ratio (terms of trade) is

the ratio of a country's exports relative to its imports. Terms of trade = (Price of exportable goods / price of importable goods) x 100