Chapter 2 – PCBR
November 2 /2011
Two principal issues have shaped the debate on appropriate trade policies
1. If a national government should intervene to protect the country’s domestic firms by taxing
foreign goods entering the domestic market or constructing other barriers against imports.
2. Whether a national government should directly help the country’s domestic firms increase their
foreign sales through export subsidies, government-to-government negotiations, and
guaranteed loan programs.
- Issue if govt should promote free trade or fair trade
o Free trade: national govt exerts minimal influence on the exporting and importing
decisions of private firms and individuals.
o Fair trade(managed trade): the national government should actively intervene to ensure
that domestic firms’ exports receive an equitable share of foreign markets and that
imports are controlled to minimize losses of domestic jobs and market share in specific
Also that govt should ensure ‘level playing field’ often used to justify policies
that restrict foreign competition.
Industry-Level Arguments (addresses the need of individual industries)
- National defence argument: used as a reason to support governmental protection of specific
- A country must be self-sufficient in critical raw materials, machinery, and technology or else be
vulnerable to foreign threats.
- Appeals to the general public (concerned that its country will be pushed around by other
countries that control critical resources)
- Infant industry argument: imposition of tariffs on numerous imported manufactured goods to
give U.S. firms temporary protection from foreign competition until they could fully establish
themselves. First secretary of the treasury feared that the young USA’s manufacturers would
not survive their infancy and adolescence b/c of fierce competition from more mature European
- Maintenance of existing jobs: well-established firms in high-wage countries are often
threatened by imports from low-wage countries want to maintain existing employment levels
firms/workers ask govts for relief from foreign competition tend to say yes (tariffs, quotas,
- Absolute advantage and comparative advantage: classic trade theories that assume that firms
operate in perfectly competitive markets (only in textbooks lol) therefore when economists
criticize govt intervention for helping local firms compete internationally.
- Strategic trade theory: new models of intl trade that provide a new theoretical justification for
govt trade intervention, thus supporting firms’ requests for protections. It applies to those
industries capable of supporting only a few firms worldwide. A firm can earn monopoly profits if
it can succeed in becoming one of the few firms in such a highly concentrated industry. --- >
suggests that a national govt can make its country better off if it adopts trade policies that
improve the competitiveness of its domestic firms in such oligopolistic industries. National Trade Policies
- Export promotion strategy: a country encourages firms to compete in foreign markets by
harnessing some advantage the country possesses, such as low labor costs.(want foreign
- Import substitution strategy: encourages the growth of domestic manufacturing industries by
erecting high barriers to imported goods. (don’t want imports)
- Industrial policy: the national government identifies key domestic industries critical to the
country’s future economic growth and then formulates programs that promote their
competitiveness. (basically govt identifies industries that it thinks will be profitable and then
- Public choice analysis(a branch of economics that analyzes public decision making): the special
interest will often dominate the general interest of any given issues b/c special-interest groups
are willing to work harder for the passage of laws favourable to their interests than the general
public is willing to work for the defeat of laws unfavourable to its interests.
Barriers to International Trade
- Tariff: tax that is placed on a good that is trade internationally
- Export tariff: taxes levied on goods as they leave the country
- Transit tariff: taxes levied on goods as they pass through on country bound for another
- Import tariff: taxes collected on imported goods.
o 1. Ad valorem tariff: assessed as a percentage of the market value of the imported good.
Most tariffs imposed by developed countries are ad valorem.
o 2. Specific tariff: assessed as a specific dollar amount per unit of weight or other
o 3. Compound tariff: both an ad valorem component and a specific component.
- Harmonized tariff schedule: a detailed classification scheme for imported goods.
- Why have tariffs been imposed?
o 1. Raise revenue
o 2. Trade barrier – increase the demand for domestically produced substitute g