Keep it simple, I leave the docs on a file

I. Fighting Unemployment in domestic industries.

1. Aim: to protect jobs in some industries (e.g., Gov’t may wish to protect domestic steelworkers.

2. Achieved by limiting imports.

3. Could backfire if it leads to loss of domestic jobs in other peripheral industries (e.g., if, due to reduction in imports, the volume of shipping decreases; therefore, affecting dock workers).

4. Other countries may retaliate when threatened with trade restrictions (e.g., China).

II. Protecting “Infant Industries”

1. Infant Industry Argument: Government should protect an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own

2. Problem w/Infant Industry Argument

a. There will be a lack of incentive for protected producers to become competitive and efficient.

b. Difficult for gov’t and other entities to predict which industry will become successful.

c. Once implemented, difficult to remove government support.

B. ECONOMIC RATIONALES (REASONS) FOR GOVERNMENT INTERVENTION (continued)

III. To Develop Industrial Base (continued)

1. Aim: To protect manufacturing sectors due to their higher potential for growth as opposed to agricultural sectors.

2. Prices for manufactured goods typically rise faster than agricultural goods.

3. Methods used to develop industrial base

a. Surplus agricultural workers –

i. Concept: relocating workers from (rural) agricultural industries to (urban) industrial and manufacturing industries.

ii. Potential problems:

· May be difficult for relocated workers to find jobs, shelter, etc., in city.

· May be easier to improve agricultural production methods than to switch industries.

· Technological advancements in manufacturing has led to reduced need for unskilled workers.

b. Promoting investment inflows – Foreign firms will invest (using FDI) in a country if the gov’t uses import restrictions to lock them out (e.g., Japanese auto makers building manufacturing plants in the U.S. when U.S. govt threatened to restrict imports).

c. Diversification (of products) – Encourage the production of other goods in order to reduce the dependence on one primary product (e.g., government encourages production of electronics to reduce dependence on wheat farming).

d. Growth in manufactured goods – OMIT

e. Import Substitution and Export-led Development (continued)

i. Import substitution: When gov’t restricts imports, domestic producers are encouraged to manufacture goods at home that were formerly imported.

ii. Export-led development

· Concept: gov’t provides assistance to private industry to increase exports.

· Can be the result of a successful import substitution program (e.g., Taiwan, S. Korea).

IV. To Manipulate Economic Relationships with Other Countries using:

1. Balance-of-trade adjustments – running trade deficits or surpluses (e.g., through currency adjustments; monetary and fiscal policy)

2. Comparable access/Fairness argument – the argument that countries are entitled to equal access to the markets of their trade partners

3. Import restrictions – threatening to limit imports (e.g., may lead to voluntary export restraints)

4. Export restrictions

a. Restricting exports from their country forces up world prices for such exports.

b. Used if shortage of domestic supplies

c. Only feasible if the country has a monopoly or near-monopoly of that good (e.g. OPEC).

5. Prevent dumping – Occurs when producers sell goods in a foreign market at prices below cost or below their home country price.

OMIT “Prevention of Foreign Monopolies” and “Optimum-tariff Theory”

C. NON-ECONOMIC RATIONALES (REASONS) FOR GOVT INTERVENTION

I. To Protect or Maintain “Essential” Industries

1. Essential-industry Argument – gov’t should protect “essential” industries from imports during peacetime to avoid dependence on foreign suppliers during war (e.g., U.S. defense industry).

2. Achieved by limiting competition or ownership by foreign companies in domestic industries.

II. To Promote Acceptable Practices Abroad

1. By limiting trade with “unfriendly countries”.

2. Achieved by imposing export restrictions on domestic producers through embargoes.

III. To Maintain Spheres of Influence – Gov’t will use trade restrictions etc., to force other countries to comply (e.g., Caribbean Basin Initiative).

IV. To Preserve National Culture – Imports of culturally influential goods (music, film, etc.) restricted to protect the culture from outside influence.

D. INSTRUMENTS OF TRADE CONTROL

I. Tariff Barriers

1. Directly affect prices

2. Tariff

a. Defined as: a fee imposed on goods entering, leaving or passing through a country.

i. Specific duty – tariff imposed on a per-unit basis (e.g., $100 on each computer).

ii. Ad valorem duty – tariff imposed as % of item’s value.

iii. Compound duty – tariff imposed using a combination of specific and ad valorem duty.

Continued

b. Types (of tariffs) include (continued):

iv. Export tariff – imposed on goods leaving the country.

v. Transit tariff – imposed on goods passing through the country.

vi. Import tariff – imposed on goods entering the country.

I. Non-tariff Barriers (may affect price or quantity)

1. Non-tariff barriers affecting price

a. Subsidies – a direct payment by gov’t to its domestic producers (e.g., gov’t pays portion of production costs of wheat producers).

b. Aid and loans – government aid/loans with conditions attached (e.g., funds must be spent domestically).

c. Customs valuation – amount of duty assessed and the methods used by customs officials to determine this amount.

2. Non-tariff barriers affecting quantity

a. Quota

i. Defined as: limit placed on the quantity of an item imported or exported.

ii. Types include:

· Voluntary export restraints (VER) – one country asks another to voluntarily restrict exports or else face restrictions (e.g., U.S. with Japanese auto manufacturers).

· Embargoes – prohibits all trade

b. “Buy Local” legislation – restrict gov’t purchases to domestic goods only. Problem is trying to classify global products as “domestic” or “imported”

Continued

2. Non-tariff barriers affecting quantity (continued)

c. Standards and labels – standards (e.g., labeling requirements, additional emissions control systems, testing raise the cost of production

d. Specific permission requirements – governments may require that importers:

i. Obtain import or export licenses (i.e., government permission prior to importing (or exporting) goods).

ii. Follow foreign exchange control procedures (i.e., importers must apply to government agencies to secure the foreign exchange needed to purchase imports).

e. Administrative delays – delays due to bureaucratic “red tape” (e.g., clearing customs, government inspections).

OMIT from “Reciprocal Requirements” to the end of the chapter.