ECO 310, Week 7
Popular in Issues in the Global Economy
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This 0 page Class Notes was uploaded by Tori Notetaker on Saturday March 19, 2016. The Class Notes belongs to Eco 310 at Murray State University taught by Mary Reed in Spring 2016. Since its upload, it has received 7 views. For similar materials see Issues in the Global Economy in Economcs at Murray State University.
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Date Created: 03/19/16
Week 7 Chapter 7 Key Terms httpsquizet com12 798991 3eco3l Ochapter 7 terms ashcards Key Concepts From text and lecture ldentizj the policy instruments used by governments to in uence international trade ows 0 Instruments of Trade Policy 0 Seven Main Instruments 0 Tariffs In most cases tariffs are placed on imports to protect domestic producers from foreign competition gt raises the price of imported goods Two types 0 Speci c Ad Valorem Import Tariffs Those who gain 0 Government gains from tariffs increasing government revenues 0 Domestic producers gain because the tariffs award them protection against foreign competitors by increasing the costs of imported goods 0 Those who loose 0 Consumers loose because they have to pay more for imports Whether the gains to the government and domestic producers exceed the loss to consumers depends on various factors 0 Tariff amounts 0 Importance of the imported good to domestic consumers 0 Number ofjobs save in the protected industry 0 Conclusions derived from economic analysis of the effect of import tariffs o Tariffs are generally proproducer and anticonsumer Protects producers from foreign competitors restricting supply leads to higher domestic pnces Reduces overall ef ciency of the world economy 0 The protective tariff encourages rms to produce domestically rather than abroad gt inef cient utilization of resources o Subsidies Take the forms of cash grants lowinterest loans tax breaks government equity participation in domestic rms Agriculture is the biggest bene ciaries in most countries In practice subsidies haven39t really helped a country in gaining a competitive edge but have protested inef ciency and promoted excess production If subsidies were abandoned studies show that the global economy would rise By lowering production costs subsidies help rms Compete against foreign imports Gain export markets Main gains are to domestic producers In turn increases international competitiveness 0 Import Quotas and Voluntary Export Restraints Limit import competition Always raises the price of a domestic good If a domestic industry lacks capacity to meet demand import quotas can raise prices for both domestic and imported products 0 Local Content Requirements Used to shift manufacturing bases from simple assembly of parts to locally manufacturing components parts 0 Protect local jobs and industry from foreign competition Domestic producers bene t but prices on imported goods rise 0 Administrative Policies Bene t producers and hurt consumers by denying access to possible superior foreign goods 0 Antidumping Policies Dumping A way for rms to unload excess product in foreign markets 0 Can be a predatory move where rms drop prices in a foreign country to drive out local competition If a domestic producer thinks a foreign rm is dumping they can complain to the Commerce Department and the International Trade Commission Understand Wh y governments sometimes intervene in international trade 0 The case for Government Intervention o Arguments for government intervention take two paths Political Protect the interests of certain groups within a nation producers at the expense of other groups consumers or to achieve a political objective outside of economic relationships such as protecting human rights Economic Boost the overall wealth of a nation bene ting both producers and consumers 0 Political Arguments for Intervention Protecting Jobs and Industries 0 Government intervention is necessary for protecting jobs and industries from foreign competition 0 However it usually back res and ends up raising consumer prices National Security governments protect industries important for national secur y Retaliation The use of threats to intervene in trade policy as a bargaining tooI would help open foreign markets and force trading partners to do what you want 0 The pressured government may respond by raising trade barriers of its own Protecting Consumers In order to protect consumers from unsafe or potentially hazardous products the government will issue regulations to limit or ban the importation of products Furthering Foreign Policy Objectives 0 Trade policies used to either create strong relations with a country or to punish a quotrogue statequot that39s not abiding to international laws or norms Protecting Human Rights Governments tend to use trade policies to attempt to better human rights in other countries 0 Economic Arguments for Intervention The Infant Industry Argument 0 In order for new infant industries to develop older established industries need to provide their support Recognized by GA39IT Critics 0 Only helpful if it makes the infant industry ef cient o Assumption that rms can39t make quotef cient long term investmentsquot by borrowing from their own markets Strategic Trade Policy 0 quota government can help raise national income if it can ensure that the rms that gain rstmover advantages in an industry are domestic rather than foreign o A government then should use subsidies to support promising rms that are active in newly emerging industriesquot 0 quotit might pay a government to intervene in an industry by helping domestic rms overcome the barriers to entry created by foreign rms that have already reaped rst mover advantagesquot 0 Government should provide export subsidies Summarize and explain the arguments against strategic trade policy 0 Revised for Free Trade 0 Retaliation and Trade War Argued by Krugman strategic trade policies aimed at dominant domestic rms is a quotBeggarthyNeighborquot policy and will ultimately promote retaliation and leave all countries involved in worse shape than before 0 Domestic Policies quotAccording to Krugman such a policy is almost certain to be captured by specialinterest groups within the economy which will distort it to their own endsquot In reference to the in uence of political interest groups Describe the development of the world trading system and the current trade issue 0 Development of the World Trading System 0 The evolution from GATI39 to the WTO 0 From Smith to the Great Depression Britain was the world39s largest exporting country and was moving to stimulate free trade however the effects of the great depression and the passing of the SmootHawley Act by the US Congress pretty much swatted away the notion and several countries raised trade barriers instead 0 19471979 GA39IT Trade Liberalization and Economic Growth After the great depression the opinion of the US Congress strongly supported free trade and moved to establish GA39IT in 1947 0 19801993 Protectionist Trends Japan39s economic success and the trading de cits of the US put signi cant strains on the trading patterns of the world Several countries found ways to get around the regulations imposed by GATI39 Vertical Export Restrictions VERs o The Uruguay Round and the World Trade Organization Uruguay Round provisions enacted in 1995 Tariffs on industrial goods were to be reduced by more than onethird and tariffs were to be scrapped on more than 40 of manufactured goods 0 Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 value the lowest level in modern history 0 Agricultural subsidies were to be substantially reduced GA39IT fair trade and market access rules were to be extended to cover a wide range of services GA39IT rules also were to be extended to provide enhanced protection for patents copyrights and trademarks intellectual property Barriers on trade in textiles were to be signi cantly reduced over 10 years The World Trade Organization was to be created to implement the GATT agreement The WTO Thje WTO focuses on 0 Services quotGeneral Agreement on Trade in Services GATS extends free trade agreements to services 0 Intellectual property TradeRelated Aspects of Intellectual Property Rights TRIPS attempts to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rulesquot Members of the WTO are not able to block adoption of arbitration reports 0 Unless consensus rejects them 0 WTO Experience to Date WTO members account for 98 of world trade WTO as Global Police Expanding Trade Agreements 0 The Future of the WTO Unresolved Issues and the DOHA Round Antidumping Policies Encouraging members to improve government regulations on antidumping policies Protectionism in Agriculture High tariffs and subsidies in countries are causing consumers to pay higher prices on imported agg products leaving them less money for other necessary goods and services quotfree trade in agriculture could help jumpstart economic growth among the world39s poorer nations and alleviate global poverty Protecting Intellectual Property Prevents other nations from creating imitations of intellectual products which would lower incentives for innovann Market Access for Nonagricultural Goods and Services The aim of the WTO is to reduce tariff rates to zero New Round of Talks Doha Cutting tariffs on industrial goods and services Phasing out subsidies to agricultural producers 0 Reducing barriers to crossborder investments 0 Limiting the use of antidumping laws