3. International Trade Restrictions and Agreements
e. compare types of trade and capital restrictions and their economic implications;
f. explain motivations for and advantages of trading blocs, common markets, and economic unions;
g. describe common objectives of capital restrictions imposed by governments;
What are the three types of trade policies that restrict trade?
1. Tariffs - a tax levied on goods imported into a country
2. Quotas - a specific limit or maximum quantity (or value) of a good permitted to be imported into a country during a given period
3. Export subsidies - a government policy to encourage export of goods and discourage sale of goods in the domestic market
What impact do trade restrictions have on small countries vs large countries?
- Due to small volume, small countries can't set prices, and always generate a net welfare loss when larger countries impose trade restrictions.
- Due to large volume, trade restrictions can generate a net welfare gain if it imposes even larger welfare loss on its trading partners.
What is a deadweight loss?
A loss of efficiency due to trade policy that do not benefit either producers or the government.
What is voluntary export restraint (VER)?
A voluntary export restraint (VER) is an agreement between two governments in which the government of the exporting country agrees to restrain the volume of its own exports. Foreign firms and governments will sometimes agree to limit their exports to a country to avoid the imposition of other types of trade barriers.
What is a tariff?
A tariff is a tax levied on goods imported into a country. It benefits domestic producers and the government at the expense of consumers.
What is an import quota?
An import quota is a specific limit or maximum quantity (or value) of a good permitted to be imported into a country during a given period. It is designed to restrict foreign goods and protect domestic industries.
What is an export subsidy?
An export subsidy is a government policy to encourage export of goods and discourage sale of goods in the domestic market. The subsidy ends up costing the government instead of generating revenue. Also, unlike an import tariff, an export subsidy increases the amounts traded.
What is a regional trading bloc?
A regional trading bloc is an intergovernmental association that manages and promotes trade activities among countries.
What is a free trade area?
In a free trade area (FTA), all trade barriers for the goods and services among members are eliminated, but each member maintains its own policies against non-members. Example: NAFTA
What is a customs union?
A customs union is an extension of a Free Trade Area. The difference is that all members have a common trade policy against non-members.
What is a common market?
A common market further extends a customs union by allowing free movement of factors of production among members.
What is an economic union?
An economic union incorporates all aspects of a common market and, in addition, requires common economic institutions and coordination of economic policies among members.
What is a monetary union?
In a monetary union, all members adopt a common currency.
What are capital restrictions and what are they designed to do?
- Capital restrictions include prohibitions on investment by foreigners, taxes on the income earned on foreign investments by domestic citizens, quantity restrictions on capital flows, and prohibition of foreign investment in certain domestic industries.
- Capital restrictions are designed to limit or redirect capital account transactions (loans, IP transfer). Countries use capital restrictions to maintain balance of payments, control exchange rate, preserve domestic savings for domestic use, and protect infant industry.