Trade Econ Test 2

When a nation imposes a tariff on the importation of a commodity, economic influences develop that detract from national welfare. Explain.

Consumption effect- loss of welfare because of an increase in prices and a decrease in consumption Protective effect- wasted resources because less efficient domestic country is producing product instead of more efficient foreign production.

What factors influence the size of the revenue, protective, consumption, and redistributive effects of a tariff?

The impact of the tariffs on domestic prices and the response of domestic producers and consumers to there price changes.

Under what conditions does a nominal tariff applied to an import product over/underestimate the actual/effective protection afforded by the tariff?

When materials or intermediate products enter a country at a low duty while the final imported product is protected by a high duty, the nominal tariff rate on the final product overstates the effective rate of protection and vice versa.

Describe a specific, ad valorem, and compound tariff. What are the advantages/disadvantages of each?

A Specific tariff is expressed as a fixed amount of money per units of the imported product. Easy to calculate but doesn't adjust to price changes. An ad valorem tariff is a fixed percentage of the value of the imported product as it enters the country. Always same % of the value of the good/service but harder to calculate. Compound tariff combines specific and ad valorem. Can use best and worst parts of each tariff but can be used in a protectionist manner.

Would a tariff imposed on US oil imports promote energy development and conservation for the US?

An increase in the price of oil in the US would encourage domestic production and discourage domestic consumption.

Why might firms using US steel lobby against the imposition of quotas on foreign steel sold in the US?

Because there is more scarcity of steel in the domestic market and a decrease in competition. Quotas lead to higher steel prices and production costs for domestic steel-using firms. Such cost increases detract fro their international competitiveness.

Define bonded warehouse and foreign-trade zone. How do they help importers mitigate the effects of domestic import duties?

Bonded warehouse- storage facility for imported goods, can be sold overseas duty-free or domestically after duties are paid Foreign-trade zone- site where foreign merchandise can be imported without duties, merchandise can be stored here or used to manufacture final products.

Although tariffs may improve the welfare of a nation, it hurts the world. When is this true?

By increasing the price of goods, trade decreases because of tariffs. For the world as a whole, there are no favorable terms of trade to offset the trade volume effect.

Less developed nations sometimes argue that the industrialized nations tariff structures discourage them from undergoing industrialization. Explain.

Developing countries argue that industrial countries allow raw materials to be imported at low nominal tariff rates while maintaining high nominal tariff rates on finished products. This encourages the developing countries to continue exporting raw materials and not finished goods and thus makes it harder for them to industrialize.

What are the major forms of subsidies governments grant to domestic producers?

Domestic and export subsidies, tax concessions, low interest rate loans, loan guarantees, and insurance arrangements.

A subsidy may provide import competing producers the same degree of protection as tariffs/quotas but at lower costs in therm of national welfare. Explain.

Domestic subsidies avoid deadwight losses (net loss of economic benefits to a domestic economy because of the protection/consumption effect of a trade barrier) due to consumption effect (loss of welfare from an increase in price and a decrease in consumption).

What methods do customs appraisers use to determine the values of commodity imports?

Free-on-board technique: tariff applied to value when leaving exporting country Cost-insurance-freight technique: tariff is % of value when arrives at destination

A nation that imposes tariffs on imported goods may find its welfare improving should the tariff result in a favorable shift in terms of trade. Explain.

Given a large country model, a country which imposes a tariff on imports finds its terms of trades improving, should the favorable terms of trade more than offset the deadweight losses resulting from the tariff, national welfare improves.

Which is a more restrictive trade barrier- import tariff or quota?

Import quotas because they directly limit the number of goods that can enter the home nation. Income tariffs can be circumvented by foreign producers absorbing the tariff as a lower selling price. During periods of rising domestic demand, quotas hold down imports more effectively than tariffs.

Which of the arguments for tariffs do you feel are most relevant in today's world?

Most arguments for restriction are invalid. However, arguments for infant industry and national security have some validity. Infant industry restrictions give new industries time to establish themselves in the market and national security restrictions help keep a country safe.

Rather than generating tax revenue as do tariffs, subsidies require tax revenue. Therefore, they're not an effective protective device for the home country. Do you agree?

No. Subsidies aren't free goods since they are financed by taxpayer dollars. In return for granting subsidies, governments often pressure management and labor to adopt measures to lower costs of production so as to become more competitive.

Concerning international dumping, distinguish between the price and cost-based definitions of foreign market value.

Price-based: dumping occurs whenever a foreign firm sells a product in the importing country's market at a price below that for which the product is sold in the firm's home market. Cost-based: dumping occurs when foreign merchandise is sold in the domestic market at "less than fair value" (ie. price is less than average total cost).

Differentiate between sporadic, persistent, and predatory dumping.

Sporadic- firms with temporary inventory sell products overseas at lower prices than at home. Predatory- firms cut prices overseas to eliminate competition Persistent- to maximize profits, firms continuously sell abroad at lower prices than home.

What impact does the imposition of a tariff normally have on a nations terms of trade and volume of trade?

Terms of trade increase and volume of trade decreases

How does the revenue effect of an import quota differ from a tariff?

The revenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured by domestic/foreign firms.

What is meant by voluntary export restraints and how do they differ from other protective barriers?

They are market-sharing agreements negotiated by producing and consuming countries. Because they are typically administered from the supply side of the market, the foreign exporter tends to capture the largest share of the quota revenue.

What would be the likely effects of export restraints imposed by Japan on its auto shipments to the US?

Under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply side of the market, the largest share of the revenue effect tends to be captured by foreign exporters. The distribution of the revenue effect tends to accrue to foreign auto-makers.

Which tends to result in a greater welfare loss for the home country: import quota by home government or voluntary export by foreign government?

Voluntary export by foreign government because under an import quota, the distribution of the revenue effect is indeterminate, depending on the relative bargaining power of foreign producers and domestic buyers. Because voluntary export quotas are typically administered from the supply side of the market, the largest share of the revenue effect tends to be captured by foreign exporters.

In the past two decades nontariff trade barriers have gained in importance as protectionist devices. What are the major nontariff trade barriers?

import quotas- restrict the amount that can come into a country voluntary export agreements- country agrees to export only a certain amount subsidies, buy-national policies, product and safety standards, and content requirements.