Module 4

Objectives of the module

• Tariffs
• Subsidies
• Local content requirements,
• Administrative Policies
• Anti-dumping policies
• Political and economic argument for
intervention
• Classical Theories supporting Free
trade

• Government intervention due to

political interests
Trade policy uses seven main instruments

– Tariffs
– Subsidies
– Import Quotas
– Voluntary export restraints
– Local content requirements
– Administrative policies
– Antidumping duties
 TARIFFS
• A tax levied on imports

• Two categories
– Specific tariff & Ad valorem tariffs

• 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
• A tariff raises the cost of imported products.

• In most cases tariffs are put in place to protect

domestic producers from foreign
•
• They also raise revenues for the government
• Domestic producers gain, because the tariffs
affords them some protection against foreign
competitors by increasing the costs of imported
goods
• Consumer may lose because they must pay more
for certain imports
 Conclusion

• Tariffs are unambiguously pro-

producer and anti-consumer

• Tariffs reduce the overall efficiency

of the world economy
 Subsidies

• A Subsidy is a government payment

to a domestic producer
• Forms of Subsidy
– Cash grants
– Low interest loans
– Tax-breaks
– Government equity participation
 Issues with Subsidies
• Subsidies tend to protect the inefficient
and promote excess production

• E.g., Agriculture subsidies

– Allow inefficient farmers to stay in business
– Encourage countries to overproduce the
subsidized product
– Encourage countries to produce products that
could be grown more cheaply elsewhere and
imported
– Therefore, reduce international trade in
agriculture
 Import Quotas

• An import Quota is a direct

restriction on the quantity of some
good that may be imported into a
country

• This restriction is enforced by issuing

import license to a group of
individuals or firms
 Voluntary Export Restraint

• A quota on trade imposed by the

exporting country, typically at the
request of the importing country’s
government.

• The extra profit that producers make

when supply is artificially limited by
an import quota is referred to as a
quota rent.
Local content requirements

• A requirement that some fraction of a

good can be produced domestically

• This requirement can be expressed in

terms either in physical terms (75% of
component parts should be produced
locally) or in value terms (75% of the value
of this product must be produced locally )
 Administrative Policies

• Bureaucratic rules that are designed

to make it difficult for imports to
enter a country
 Anti-dumping policies
• Dumping is defined as selling the goods in
a foreign market at below their costs of
production or below fair market value

• Anti-dumping policies are designed to

punish foreign firms that engage in
dumping

• The objective is to protect domestic

producers from the unfair foreign
competition
 Government Intervention
• Political reasons
• Economic reasons
 Political Arguments for
government Intervention
• Protecting jobs and industries
• National Security
• Retaliation
• Protecting customers
• Furthering foreign policy objectives
• Protecting human rights
 Economic Arguments for
intervention

• The Infant industry argument

• Strategic Trade Policy