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INTERNATIONAL TRADE POLICY
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Free trade occurs when governments do not attempt to restrict what its citizens can buy
from another country or what they can sell to another country
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While many nations are nominally committed to free trade, they tend to intervene in
international trade to protect the interests of politically important groups
Types of Trade Policy
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3
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5
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Tariff
Export Subsidy
Import quota
Voluntary Export Restraint
Local Content Requirement
Other trade policy
Export credit subsidies
Government procurement
Bureaucratic regulations
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a
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b
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An ad valorem subsidy is a payment as a proportion of the value exported
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Also, government revenue will decrease
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In contrast to a tariff, an export subsidy worsens the terms of trade by lowering the price
of domestic products in world markets
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Import Quota
An import quota is a restriction on the quantity of a good that may be imported
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A binding import quota will push up the price of the import because the quantity demanded
will exceed the quantity supplied by domestic producers and from imports
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o Instead, the revenue from selling imports at high prices goes to quota license
holders: either domestic firms or foreign governments
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5
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Voluntary Export Restraint
A voluntary export restraint works like an import quota, except that the quota is imposed
by the exporting country rather than the importing country
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The profits or rents from this policy are earned by foreign governments or foreign producers
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Local Content Requirement
A local content requirement is a regulation that requires a specified fraction of a final good
to be produced domestically
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From the viewpoint of domestic producers of inputs, a local content requirement provides
protection in the same way that an import quota would
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Other Trade Policies
Export credit subsidies
o A subsidized loan to exporters
o U
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Export-Import Bank subsidizes loans to U
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exporters
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Bureaucratic regulations
o Safety, health, quality, or customs regulations can act as
a form of protection and trade restriction