Week 6- Instruments of Trade Policy

Summary

The video discusses various trade policy instruments that governments can use to regulate international trade, with a focus on tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, and anti-dumping measures. Tariffs can be specific or ad valorem, and while they protect local producers, they increase costs for consumers. Subsidies support local industries but may lead to inefficiencies. Import quotas and voluntary export restraints limit foreign competition, while local content requirements encourage domestic production. Anti-dumping policies prevent foreign companies from selling goods below cost to dominate markets.

Takeaways

• 💡 Tariffs are a form of trade policy where a tax is imposed on imported goods to make them more expensive and protect local producers.
• ⚖️ Specific tariffs are fixed charges on each imported item, while ad valorem tariffs are a percentage of the value of the imported goods.
• 📈 Tariffs increase government revenue but often result in higher prices for consumers, protecting producers at the expense of efficiency in the global economy.
• 💸 Subsidies are payments from the government to domestic producers, such as cash grants, low-interest loans, or tax breaks, to help them compete against cheaper foreign imports.
• 🏭 While subsidies help producers, they can lead to inefficiencies as companies may not strive to stay competitive when supported by government funds.
• 📉 Import quotas limit the amount of a particular good that can be imported into a country, often to protect local industries from foreign competition.
• 🔗 Voluntary export restraints are limits on the number of goods a country exports, typically imposed under pressure from an importing country.
• 🏗️ Local content requirements mandate that a certain percentage of a product must be made or sourced domestically, supporting local industries but potentially raising consumer prices.
• 🚫 Anti-dumping policies prevent foreign companies from selling goods below cost in another country, which can harm local businesses by undercutting prices unfairly.
• ⚠️ Countervailing duties are penalties imposed by governments on foreign firms engaging in dumping practices to protect local producers from unfair competition.

Q & A

What is a tariff and how does it affect international trade?

A tariff is a tax imposed on imported products to make them more expensive relative to locally produced goods, thereby protecting local producers. It can be in the form of specific tariffs (a fixed charge per unit) or ad valorem tariffs (a percentage of the product's value). Tariffs can increase government revenue but are generally anti-consumer as they lead to higher prices for imported goods.

How do specific tariffs differ from ad valorem tariffs?

Specific tariffs are fixed charges levied per unit of an imported item, regardless of its value. Ad valorem tariffs, on the other hand, are a percentage of the imported goods' value. Both result in increased costs for imported goods, but they calculate the additional tax differently.

What is the impact of tariffs on consumers and local producers?

Tariffs protect local producers by making foreign competition more expensive, but they are anti-consumer because consumers end up paying more for imported goods. This can also reduce the overall efficiency of the world economy.

Can you explain the concept of subsidies in trade policy?

Subsidies are financial assistance given by the government to domestic producers, such as cash grants, low-interest loans, or tax breaks, to encourage production in specific industries. They help local producers compete against foreign imports and gain export markets but can lead to overproduction and inefficiencies.

Why might a government provide subsidies to a company like Holden in Australia?

The Australian government provided subsidies to Holden to help them compete against cheaper foreign imports, especially those from countries with lower labor costs. The subsidies also helped Holden develop a left-hand drive program to expand into overseas markets.

What is an import quota and how does it work?

An import quota restricts the quantity of a specific good that can be imported into a country. It's used to protect local industries from foreign competition by limiting the supply of imported goods. For example, the U.S. had a quota on Chinese textile imports under the Multi-fiber Agreement until 2005.

What is a tariff-rate quota and how does it differ from a regular quota?

A tariff-rate quota is a hybrid of a quota and a tariff. It allows a certain quantity of a good to be imported at a lower tariff rate, and any imports beyond that limit are taxed at a higher rate. This discourages importers from exceeding the quota limit set by the government.

What is quota rent and how is it created?

Quota rent refers to the extra profit that producers can make when the supply of a product is artificially limited by an import quota imposed by the government. It represents the economic rent that producers gain due to the restricted competition.

What are voluntary export restraints and why are they used?

Voluntary export restraints are limitations on the number of items that can be exported to a particular country, imposed by the exporting country at the request of the importing country. They are used to protect domestic industries from being overwhelmed by foreign competition and can result from trade negotiations or pressures.

How do local content requirements affect trade and local industries?

Local content requirements mandate that a certain percentage of a product's components or value must be sourced or produced locally. They help promote local manufacturing and related industries but can increase costs for consumers and limit the availability of imported components.

What is dumping, and how do anti-dumping policies counter it?

Dumping is the practice of selling goods in a foreign market at below the cost of production or below fair market value, often to gain market share. Anti-dumping policies, such as countervailing duties, are used by governments to penalize foreign firms that engage in dumping and protect local producers from unfair competition.