Chapter 1

trade patterns are determined by the relative productivity of different factors of production in different
countries
free trade refers to a situation in which a government does not attempt to restrict what its citizens can
buy from or sell to another country
consequences of free trade include both static economic gains (because free trade supports a higher
level of domestic consumption and more efficient utilization of resources) and dynamic economic gains
(because free trade stimulates economic growth and the creation of wealth).
modem international trading system, which is based on the General Agreement on Tariffs and Trade and
its successor, the WTO. The GAIT and WTO are the creations of a series of multinational treaties.
The purpose of these treaties has been to lower barriers to the free flow of goods and services between
nations. Like the GAIT before it, the WTO promotes free trade by limiting the ability of national
governments to adopt policies that restrict imports into their nations
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints,
local content requirements, administrative policies, and antidumping duties
Tariffs are the oldest and simplest instrument of trade policy
nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties
tariff is a tax levied on imports (or exports).
Tariffs fall into two categories.:Specific tariffs are levied as a fixed charge for each unit of a good
imported
Ad valorem tariffs are levied as a proportion of the value of the imported good
Sometimes tariffs are levied on exports of a product from a country. Export tariffs are far less common
than import tariffs. In general, export tariffs have two objectives: first, to raise revenue for the
government, and second, to reduce exports from a sector, often for political reasons
subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash
grants, low-interest loans, tax breaks, and government equity participation in domestic firms.
import quota is a direct restriction on the quantity of some good that may be imported into a country.
The restriction is usually enforced by issuing import licenses to a group of individuals or firms.
the international agreement governing the imposition of import quotas on textiles, the Multi-Fiber
Agreement, expired in December 2004.
common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota, a lower
tariff rate is applied to imports within the quota than those over the quota
Tariff rate quotas are common in agriculture, where their goal is to limit imports over quota.
A variant on the import quota is the voluntary export restraint. A voluntary export restraint (VER) is a
quota on trade imposed by the exporting country, typically at the request of the importing country's
government.
extra profit that producers make when supply is artificially limited by an import quota is referred to as a
quota rent.
local content requirement is a requirement that some specific fraction of a good be produced
domestically.
Local content regulations have been widely used by developing countries to shift their manufacturing
base from the simple assembly of products whose parts are manufactured elsewhere into the local
manufacture of component parts.
Buy America Act, specifies that government agencies must give preference to American products when
putting contracts for equipment out to bid unless the foreign products have a significant price advantage
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a
country.
dumping is variously defined as selling goods in a foreign market at below their costs of production or as
selling goods in a foreign market at below their "fair" market value.
Dumping is viewed as a method by which firms unload excess production in foreign markets
Antidumping policies are designed to punish foreign firms that engage in dumping.
antidumping duties are often called countervailing duties). These duties, which represent a special tariff,
can be fairly substantial and stay in place for up to five years.
Political arguments for intervention are concerned with protecting the interests of certain groups within
a nation (normally producers), often at the expense of other groups (normally consumers), or with
achieving some political objective that lies outside the sphere of economic relationships, such as
protecting the environment or human rights.
Economic arguments for intervention are typically concerned with boosting the overall wealth of a
nation (to the benefit of all, both producers and consumers).
CAP was designed to protect the jobs of Europe's politically powerful farmers by restricting imports and
guaranteeing pricesHelms-Burton Act. This act allows Americans to sue foreign firms that use property
in Cuba confiscated from them after the 1959 revolution. Later in 1996, Congress passed a similar law,
the D'Amato Act, aimed at Libya and Iran.
MFN status allows countries to export goods to the United States under favorable terms.
infant industry argument is by far the oldest economic argument for government intervention.
Alexander Hamilton proposed it in 1792. According to this argument, many developing countries have a
potential comparative advantage in manufacturing, but new manufacturing industries cannot initially
compete with established industries in developed countries. To allow manufacturing to get a toehold,
the argument is that governments should temporarily support new industries (with tariffs, import
quotas, and subsidies) until they have grown strong enough to meet international competition.
new trade theory argues that in industries in which the existence of substantial economies of scale
implies that the world market will profitably support only a few firms, countries may predominate in the
export of certain products simply because they have firms that were able to capture first-mover
advantages.
Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer
demand away from foreign products, the Smoot-Hawley Act erected an enormous wall of tariff barriers.
GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs,
subsidies, import quotas, and the like. From its foundation in 194 7 until it was superseded by the WTO
WTO acts as an umbrella organization that encompasses the GAIT along with two new sister bodies, one
on services and the other on intellectual property.
The WTO's General Agreement on Trade in Services (OATS) has taken the lead to extending free trade
agreements to services.
The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights ( TRIPS) is an attempt to
narrow the gaps in the way intellectual property rights are protected around the world and to bring
them under common international rules.
bound tariff rates are the highest rate that can be charged, which is often, but not always, the rate that
is charged

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trade patterns are determined by the relative productivity of different factors of production in different

Tariffs are the oldest and simplest instrument of trade policy

tariff is a tax levied on imports (or exports).

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