MODULE 3: The Political Economy of International Trade

• It is a field of study that explores the relationship between politics and economics.

  Political Economy
• It is a fundamental driver of economic growth, prosperity, and global interconnectedness.

  International Trade
• This means selling and sending goods or products to othercountries.

  Export
• This means buying and bringing goods or products from other countries into your own country.

  Import
• It refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country.

  Free Trade
• INSTRUMENTS OF TRADE POLICY

  1. Tariffs
  2. Subsidies
  3. Import Quotas
  4. Voluntary Export Restraints
  5. Local Content Requirements
  6. Antidumping Policies
  7. Administrative Policies
• This is a tax levied on imports that effectively raises thecost of imported products relative to domestic products.

  Tariffs
• TYPES OF TARIFFS

  • Specific Tariffs
  • Ad valorem Tariffs
• They are levied as a fixed charge for each unit of a good imported.

  Specific Tariffs
• They are levied as a proportion of the value of the imported good (percentage based).

  Ad valorem Tariffs
• ADVANTAGES OF TARIFFS

  • Increase government revenues.
  • Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods.
  • Force consumers to pay more for certain imports.
• DISADVANTAGE OF TARIFFS

  • Tariffs are pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy.
• A government payment to a domestic producer.

  Subsidy
• Subsidies help domestic producers:

  • Compete against low-cost foreign imports
  • Gain export markets
• Subsidies can make it more affordable for domestic producers to manufacture goods or provide services.

  Compete against low-cost foreign imports
• Subsidies can also help domestic producers expand their presence in international markets.

  Gain export markets
• DISADVANTAGES OF SUBSIDIES

  • Higher Prices for Taxpayers
  • Indirect Cost Transfer
  • Price Impact
• Subsidies are typically funded by the government using taxpayer money.

  Higher Prices for Taxpayers
• These taxpayer funds used for subsidies indirectly affect consumers.

  Indirect Cost Transfer
• Depending on the nature of the subsidy and the industry itsupports, it can lead to higher prices for consumers.

  Price Impact
• It is a direct restriction on the quantity of some good that may be imported into a country.

  Import Quota
• They are a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota.

  Tariff Rate Quotas (TRQs)
• They are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government.

  Voluntary Export Restraints (VERs)
• It is the extra profit that producers make when supply is artificially limited by an import quota.

  Quota Rent
• TYPES OF IMPORT QUOTAS

  • Domestic Producers
  • Domestic Industries
• Import quotas often benefit domestic producers by limiting the quantity of foreign goods entering the market.

  Domestic Producers
• Entire industries, particularly those facing strong foreign competition, can benefit from import quotas.

  Domestic Industries
• TYPES OF VOLUNTARY EXPORT RESTRAINTS

  • Foreign Producers
  • Importing Country's Domestic Producers
  • Maintaining Trade Relations
• VERs are typically implemented at the request of the importing country. Foreign producers can benefit from VERs.

  Foreign Producers
• Importing country's domestic producers may benefit from VERs if they were concerned about foreign competition.

  Importing Country's Domestic Producers
• VERs can help maintain positive trade relations between countries.

  Maintaining Trade Relations
• It demands that some specific fraction of a good be produced domestically.

  Local Content Requirement
• It is selling goods in a foreign market below their cost ofproduction, or selling goods in a foreign market at below their “fair” market value.

  Dumping
• They are measures to counteract unfair trade practices, such as selling goods in a foreign market at a price below their production cost (dumping).

  Antidumping Polices
• They are bureaucratic rules that are designed to make it difficult for imports to enter a country.

  Administrative Trade Policies
• TWO TYPES OF ARGUMENTS of a Political Economy in International Trade

  1. Political Arguments
  2. Economic Arguments
• They are protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers).

  Political Arguments
• They are boosting the overall wealth of a nation (to the benefit of all, both producers and consumers).

  Economic Arguments
• Political arguments for government interventioninclude:

  1. Protecting jobs
  2. Protecting industries deemed important for national security
  3. Retaliating to unfair foreign competition
  4. Protecting consumers from "dangerous" products
  5. Furthering the goals of foreign policy
  6. Protecting the human rights of individuals in exporting countries
• Economic arguments for government interventionin international trade include:

  1. Infant Industry Management
  2. Strategic Trade Policy