TRADE BARRIERS

CHAPTER 7
 Arguments For
Trade Restrictions

• National Defense • Sanctions to Punish

– Industries vital to Offending Nations
national security – Inflict economic
must be kept damage to punish or
operating even encourage desired
though not change
competitive with
foreign suppliers – Give me examples

– Do you agree with

this?
–
 Arguments For
Trade Restrictions
• Protect Infant (or • Protect Domestic Jobs
Dying) Industry from Cheap Foreign
– Protect new industries till Labor
they gain comparative – Low labor costs bring in
advantage lower priced goods and
– Protect new industries eliminate home-country
against lower cost imports jobs
– Protect smooth transition • Fallacies:
of dying industry’s – Wages do not represent
resources to other sectors
the total production cost
– Productivity rates greater
– Do you agree with this? in developed countries
– Which are the risks?
 Arguments For
Trade Restrictions

• Scientific Tariff/Fair • Retaliation

Competition
– Import duty to bring cost of
imports up to cost of
domestic goods: “fair
competition”
– Industries facing restrictions
ask their governments to
retaliate with similar
restrictions
– US Beef in EU…retaliation

– Punish efficiency and

reward inefficiency
 The Case for Government Intervention 1 of 5
Learning Objective 7-2 Understand why governments sometimes intervene in international trade.

Political Arguments for Intervention

• Protecting jobs and industries
• Most common political reason for government intervention
• Critics say unfair competition claims overstated for political
reasons
• Protecting national security
• Certain industries, like defense-related ones, protected

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 The Case for Government Intervention 2 of 5

Political Arguments for Intervention continued

• Retaliating
• Government uses threat of intervention as bargaining tool to
open foreign markets
• May liberalize trade and result in economic gains
• Risky strategy
• Protecting consumers
• Protect consumers from unsafe products
• Indirect effect is limit or ban of imports

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 The Case for Government Intervention 3 of 5

Political Arguments for Intervention continued

• Furthering foreign policy objectives
• Government may grant preferential trade terms to a country
it wants to build strong relations with
• Protecting human rights
• Government trade policy used to improve human rights
policies of trading partners (ex. apartheid)

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 The Case for Government Intervention 4 of 5

Economic Arguments for Intervention

• The infant industry argument
• Support comes through tariffs, import quotas, subsidies
• Two criticisms
• Protection of manufacturing from foreign competition
does no good unless the protection helps make the
industry efficient
• Assumes firms are unable to make efficient long-term
investments by borrowing money from the domestic or
international capital market

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 Instruments of Trade Policy 1 of 6
Learning Objective 7-1 Identify the policy instruments used by governments to influence international trade
flows.

Tariffs
• Specific tariffs per product
• Ad valorem tariffs
• Impact:
• Increase government revenues
• Force consumers to pay more for certain imports
• Are pro-producer and anti-consumer
• Reduce the overall efficiency of the world economy

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 Tariff Barriers
• Taxes on imports to raise their price to reduce
competition for local producers or to stimulate local
production. Ad valorem, Specific duty, compound
duty
• Ad valorem: % of the invoice value
• Specific duty: % per unit
• Compound duty: Both
 Non-tariff barriers
● A formof restrictive trade where
barriers to trade are set up and take
a form other than a tariff.
● Non-tariff barriers include quotas,
labeling requirements, customs
bureaucracy, sanitary restrictions,
and other forms which are frequently
used.
 Types of non-tariff barriers
● Quotas
● Subsidies
● AgriculturalSubsidies
● Regional content requires
● Importing Licensing
● Customs Regulations and formalities
● Standards and Labeling requirements
● Sanitary norms
Non-quantitative Non-tariff Barriers
• Direct government participation in trade:
– Government subsidy – to protect and support targeted
industries (agriculture)
– Government procurement policies – restrict purchases of
imported goods by government agencies
– Local content – domestic manufacturing using local
materials & labor (Buy America Act)
• Customs and other administrative
procedures:
– Government policies/procedures that favor exports or
discriminate against imports
• Standards:
– Protect a nation’s citizens’ health and safety, but can be
complex and discriminatory, food hygiene safety and
standards, pesticides, food additives, organic requirements,
hormones, genetically modified crops.
 Instruments of Trade Policy 2 of 6
Subsidies
• Help domestic producers compete against foreign
imports and gain export markets
• Ex. agriculture
• Domestic producers gain while consumers typically
absorb the costs
• There are many types of subsidies: tax exemptions,
money, less bureaucratic requirements, low cost
loans… etc.

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 Instruments of Trade Policy 3 of 6
Import Quotas and Voluntary Export Restraints:
Quantitative Restrictions

Import quotas
• Usually enforced by issuing import licenses to a group of
individuals or firms
• Tariff rate quotas
• Hybrid of a quota and a tariff where a lower tariff is applied to
imports within the quota than to those over the quota
• Voluntary export restraint (VER)
• Can appease protectionist measures in a country

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 Instruments of Trade Policy 4 of 6
Export Tariffs and Bans
• Export tariff
• Goal is to discriminate against exporting in order to ensure
that there is sufficient supply of a good within a country
• Export ban
• Partially or entirely restricts the export of a good
• Ex. 1975 ban on U.S. crude oil exports

©McGraw-Hill Education.
 Instruments of Trade Policy 5 of 6

Local Content Requirements, percentage of the

product that needs to be made locally
• Requirement expressed in physical or value terms
• Protects domestic producers
• Consumers face higher prices

Administrative/Bureaucratic Policies
• Polices hurt consumers by limiting choice

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 Instruments of Trade Policy 6 of 6
Antidumping Policies
• Objective is to protect domestic producers from
unfair foreign competition
• Domestic producer can file a petition with the
Commerce Department and the International Trade
Commission (ITC)
• Countervailing duties
• Dumping
• Enables firms to unload excess production in foreign markets

• May be result of predatory behavior

• Firms use low prices to drive competitors out and then
raise prices and earn more profit

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 Case Analysis
• Boeing-Airbus subsidies
• Subsidies to agricultural products in EU
• Genetically Modified restriction from the EU
• EU-US hormone meat case
• Tuna fish US-Mexico
• Procurement Agreement Case
 VIDEOS
• https://www.pbs.org/newshour/show/how-trumps-ta
riffs-changed-the-fates-of-these-two-factories
• https://www.bbc.com/news/av/43953454/why-a-us-c
hina-trade-war-could-hurt-asia
• https://www.bbc.com/news/av/business-43822227/u
s-farmers-fear-chinese-tariffs-will-hit-their-exports
• https://money.cnn.com/video/news/economy/2018/0
1/26/bombardier-boeing-trade.cnnmoney/index.htm
l
• https://www.bloomberg.com/news/videos/2017-01-0
9/can-automakers-afford-trump-s-u-s-jobs-pressure
• https://www.youtube.com/watch?v=I4sx_XBeF3Q
• https://www.youtube.com/watch?v=LNga8Ps1jeE
• CAP:
https://www.youtube.com/watch?v=ranzxkS8fbU
• Choose one CASE ANALYSIS FOR
HOMEWORK:

– https://www.wto.org/

– See the rubric format in blackboard,

due on Friday the 5th in class.