International Business – Chapter 7 – The political economy of International Trade.docx
Dr Lakmal Abeysekera
International Business – Chapter 7 – The political economy of
Instruments of Trade policy
- is a tax levied on imports (exports)
- fall in to 1: specific tariffs are levied as a fixed charge for each unit of a good
imported. 2: ad valorem tariffs are levied as a proportion of the value of the
- important to understand who suffers and who gains.
- Firstly, tariffs are generally pro-producer and anti-consumer. Secondly,
import tariffs reduce the overall efficiency of the world eco.
- is a government payment to a domestic producers. May take forms of cash
grants, low-interest loans, tax breaks, and government equity participation in
- Subsidies help domestic producers by 1: competing against foreign imports,
2: gaining export markets.
- Agriculture has large subsidies compare to non-agriculture.
- Main gains accrue to domestic producers. In reality, subsidies are not that
successful at increasing the international competitiveness.
Import quotas and voluntary export restraints
- import quota: a direct restriction on some good’s quantity that may be
imported into a country.
- Tariff rate quota: hybrid of a quota and tariff. Lower tariff rate is applied to
imports within the quota than those over quota.
- Voluntary export: a quota on trade imposed by the exporting country, at the
request of the importing country’s government.
- Quota rent: the extra profit that producers make when supply is artificially
limited by an import quota.
Local content requirements
- is a requirement that some specific fraction of a good be produced
domestically. Can be expressed in either physical terms of in value terms.
Also used in developed countries.
- Limits foreign competition.
- bureaucratic rules designed to make it difficult for imports to enter a
country. Antidumping policies
- dumping: selling goods in a foreign market at below their costs of production
or selling goods in a foreign market at below their fair market value.
- Is viewed as a method by which firms unload excess production in foreign
- The policies are designed to punish foreign firms that engage in dumping.
Political arguments for intervention
- protect jobs and industries
- national security: some industries are important for national security.
- Protecting consumers: motivated to protect consumers from what was seen
to be an unsafe product.
- Furthering foreign policy objectives: grant preferential trade terms to a
country with which it wants to build strong relations. Trade policy is used to
pressure or punish rogue states that do not abide by internatio