The Instruments of Trade Policy

Sofia Elizabeth 8004
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Sofia Elizabeth 8004
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Instruments of a Trade Policy

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The Instruments of Trade Policy
  1. Tariffs
    1. A specific tariff is levied as a fixed charge for each unit of imported goods
      1. An ad valorem tariff is levied as a fraction of the value of imported goods
        1. A tariff acts like a transportation cost, making sellers unwilling to ship goods unless the Home price exceeds the Foreign price by the amount of the tariff: PT – t = P*T
          1. A tariff raises the price of a good in the importing country, so it hurts consumers and benefits producers there.
      2. Who loses
        1. Consumers who pay higher prices  The economy which remains inefficient  Employees of protected industries who don’t develop new skills
        2. Who Gains
          1. -Government - Domestic producers - Employees of protected industries keep their jobs
        3. Export Subsidy
          1. An export subsidy can also be specific or ad valorem: A specific subsidy is a payment per unit exported. An ad valorem subsidy is a payment as a proportion of the value exported.
            1. An export subsidy raises the price in the exporting country, decreasing its consumer surplus (consumers worse off) and increasing its producer surplus (producers better off).
              1. In contrast to a tariff, an export subsidy worsens the terms of trade by lowering the price of exports in world markets.
                1. An export subsidy lowers the price paid in importing countries PS* = PS – s.
                2. Import quotas
                  1. Restrict the quantity of some good that may be imported into a country
                    1. A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by Home producers and from imports.
                    2. Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
                      1. A quota rent - the extra profit that producers make when supply is artificially limited by an import quota
                      2. Voluntary export restraints
                        1. Works like an import quota, except that the quota is imposed by the exporting country rather than the importing country.
                          1. These restraints are usually requested by the importing country
                            1. The profits or rents from this policy are earned by foreign governments or foreign producers. Foreigners sell a restricted quantity at an increased price.
                            2. Local content requirements
                              1. A local content requirement is a regulation that requires a specified fraction of a final good to be produced domestically.
                                1. It may be specified in value terms, by requiring that some minimum share of the value of a good represent home value added, or in physical units.
                                2. From the viewpoint of domestic producers of inputs, a local content requirement provides protection in the same way that an import quota would.
                                  1. From the viewpoint of firms that must buy home inputs, however, the requirement does not place a strict limit on imports, but allows firms to import more if they also use more home parts.
                                  2. Antidumping policies
                                    1. Aka countervailing duties designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition
                                      1. Dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value
                                        1. May be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices
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