IB 3101 Lecture Notes - Lecture 6: Infant Industry Argument, Protectionism, Paul Krugman

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Published on 19 Mar 2017
Course
Week 6- Chapter 7- Political Economy of Trade
Political Reality of International Trade
Many nations only nominally commit to free trade
No one uses pure free trade
Use trade barriers to restrict foreign imports coming to country
Trade Protection
Protect domestic producers by restricting imports. Four different ways to
restrict imports:
1. Put a tax on them tariffs, antidumping
2. Restrict the QUANTITY of imported goods quotas and VERs
3. Make domestic producers more competitive by transferring money to
them subsidies (this restricts imports b/c they will be less price
competitive)
4. Force foreign firms to make stuff in the local market Local Content
7 Instruments of Trade Policy
1. Tariffs
Taxes on imports
Specific per unit ($)
Or ad valorem (%)
Pro domestic producer + anti domestic consumer
Reduce overall efficiency
As tariffs have gone down, less transparent forms of protection like
antidumping have risen especially in the developing world
2. Subsidies
Government payment to a domestic producer either directly or through
low cost of capital
Forms:
o Gov’t giving direct payment to producers
o Tax breams
o Low interest loans
Help domestic producers
o Compete against low-cost foreign imports
o Gain export markets
Consumers absorb costs (tax payers)
3. Import Quotas
Restrictions on amount of goods imported into a country
Tariff rate quota
Hybrid of a quota and tariff
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Raises prices on imported goods, bad for consumers
Ex. as exporter’s quantity increases then so does tariff rates
This restricts supply
o Efficiently increases or raises price for product
o Quota rent- extra profit goes to foreign producers
4. Voluntary Export Restraints (VERs)
Restriction is put by the exporting country at request of importing
country
Ex. Japanese gov’t restricts Japanese car exports to USA by USA request
Benefit domestic producers
Raise prices of imported goods
5. Local Content Requirements
Demands that some specific fraction of a good be produced domestically
o Can be in physical terms or in value terms
Fraction of a good must be produced domestically
Benefit domestic producers
Consumers face higher prices
6. Administrative Policies
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. Create inefficiency and raise prices.
Make it difficult for imports to enter a country
Policies hurt consumers by limiting choice
7. Antidumping Policies
Dumping-selling goods in a foreign market below:
o Cost of production
o Fair market value
Designed to punish foreign firms that engage in dumping by protecting
domestic producers from unfair competition.
Problem (1) TOTALLY non-transparent, corporate-driven. Our trade
partners cannot predict when these will be imposed (in contrast to
tariffs)
Problem (2) Usually, the only real unfair competition are just firms
you can’t compete with – NOT firms that are trading unfairly!
Why do gov’ts intervene in markets?
Political arguments
Economic arguments
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