Unit V – Trade Policy

Day and Date:

Unit Highlights…
 Free trade
 Protection
 Trade Barriers
 Tariffs
 Quotas
 Subsidies
Text book reference chapters…
 International Economics by Dominick
Salvatore – Chapter 8 & 9

 International Economics by Francis

Cherunilam – Chapter 9,10, & 28
Let us recapitulate…

International Trade Policy pertains to

government interference in the form of
restrictions and regulations imposed on the
free movement of commodities, capital,
investment, and people across borders.
Free Trade…
Free Trade - concept

Trade of commodities flows across

borders unhindered by government-
imposed restrictions.
Free Trade - Advantages
 Specialization in core competencies
 Economies of Scale
 Efficient utilization of global resources
 Innovation – Products and Processes
 Greater variety at lower prices for customers
 Inflow of foreign exchange
 Increase in employment, incomes, and
economic growth
Free Trade - Disadvantages

 Structural unemployment
 Exposure to cross-border cyclical
fluctuations
 Dumping
 Threat to domestic industry
Protection…Trade Barriers
 Import Tariffs
 Import Quotas
 Voluntary Export Restraints (VERs)
 Export Taxes
 Export Subsidies
 Voluntary Import Expansions (VIEs)
 Other Trade Policies
Trade Barriers…Import Tariffs

 Tax collected on imported goods.

 Two basic ways in which tariffs may be

levied:
 Specific: a fixed charge per unit of imports
 ad valorem: a fixed percentage of the value of
the commodity imported
Trade Barriers…Import Quotas
 Limitations on the quantity of goods that can
be imported into the country during a
specified period of time.
 Two basic types of quotas:
Absolute quotas: limitations on the quantity of
imports during a specified period of time
Tariff-rate quotas: allow a specified quantity of
goods to be imported at a reduced tariff rate
during the specified period
Trade Barriers…Voluntary
Export Restraints (VERs)

Restriction set by a government on the

quantity of goods that can be exported out of
a country during a specified period of time.
Trade Barriers…Export Taxes

 A tax collected on exported commodities

 Export taxes can be set on a specific or an

ad valorem basis.
Trade Barriers…Export
Subsidies

 Payments made by the government to

encourage the export of specified products.

 Subsidies can be levied on a specific or ad

valorem basis.
Trade Barriers…Voluntary
Import Expansions (VIEs)

An agreement to increase the quantity of

imports of a product over a specified period
of time.
Trade Barriers…Other Trade
Policies

 Government Procurement Policies

 Health and Safety Standards

 Red-Tape Barriers

 Trade Sanctions
Impact of tariffs…a partial
equilibrium approach
Impact of tariffs…a partial
equilibrium approach

 Consumption effect

 Production effect

 Trade effect

 Revenue effect
To conclude…

The issue of free trade versus protectionism

has been one of the greatest international
economic debates of all times.
You should now be able to,

 Describe and evaluate criticisms of Free

Trade.
 Understand the basis for trade barriers.
 Use a partial equilibrium (supply and
demand) model to show graphically the
impact of a tariff.