Professional Documents
Culture Documents
Today 7e
by Charles W.L. Hill
McGraw-Hill/Irwin
Chapter 6
Introduction
Free trade refers to a situation where a government does
not attempt to restrict what its citizens can buy from
another country or what they can sell to another country
While many nations are nominally committed to free
trade, they tend to intervene in international trade to
protect the interests of politically important groups
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Tariffs
A tariff - a tax levied on imports that effectively raises the
cost of imported products relative to domestic products
Specific tariffs are levied as a fixed charge for each
unit of a good imported
Ad valorem tariffs are levied as a proportion of the
value of the imported good
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Tariffs
Question: Why do governments impose tariffs?
Answer:
Tariffs
increase government revenues
provide protection to domestic producers against
foreign competitors by increasing the cost of imported
foreign goods
force consumers to pay more for certain imports
So, tariffs are unambiguously pro-producer and anticonsumer, and tariffs reduce the overall efficiency of the
world economy
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Subsidies
A subsidy - a government payment to a domestic
producer
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of subsidies
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Administrative Policies
Administrative trade polices - bureaucratic rules that are
designed to make it difficult for imports to enter a country
These polices hurt consumers by denying access to
possibly superior foreign products
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Administrative Policies
Dumping - selling goods in a foreign market below their
cost of production, or selling goods in a foreign market at
below their fair market value
a way for firms to unload excess production in foreign
markets
may be predatory behavior, with producers using
substantial profits from their home markets to
subsidize prices in a foreign market with a view to
driving indigenous competitors out of that market, and
later raising prices and earning substantial profits
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Administrative Policies
Antidumping polices - designed to punish foreign firms
that engage in dumping
the goal is to protect domestic producers from unfair
foreign competition
U.S. firms that believe a foreign firm is dumping can file
a complaint with the government
if the complaint has merit, antidumping duties, also
known as countervailing duties may be imposed
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Domestic Policies
Governments can be influenced by special interest
groups
a governments decision to intervene in a market may
appease a certain group, but not necessarily the
support the interests of the country as a whole
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1947-1979
The General Agreement on Tariffs and Trade was
established in 1947
The approach of GATT (a multilateral agreement to
liberalize trade) was to gradually eliminate barriers to
trade
GATTs membership grew from 19 to more than 120
nations
tariff reduction was spread over eight rounds of
negotiation
GATT regulations were enforce by a mutual
monitoring system
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1980-1993
The world trading system came under strain during the
1980s and early 1990s because
Japans economic success strained what had been
more equal trading patterns
persistent trade deficits by the U.S caused significant
problems in some industries and political problems for
the government
many countries found that although GATT limited the
use of tariffs, there were many other forms of
intervention that had the same effect that did not
technically violate GATT
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Policy Implications
International firms have an incentive to lobby for free
trade, and keep protectionist pressures from causing
them to have to change strategies
While there may be short run benefits to having
government protection in some situations, in the long run
these can backfire and other governments can retaliate
making it more difficult to construct a globally dispersed
production system
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