Download Chapter 7 International Trade Policy

School of International Trade and Economics, Guangdong University of Foreign Studies
广东省省级精品课程《国际贸易》
Chapter 7
International Trade Policy
广东外语外贸大学国际经贸学院
卢立岩 副教授
Chapter 7
International Trade Policy
7.1 International Trade Policy
Under the international trade system, governments
would adopt different trade policies to insure
their countries get the most in the world market.
These trade policies include two kinds: Free
Trade Policy and Restrictive Trade Policy
 Free Trade Policy. Under free trade policy, the
government would not intervene the trade. The
country will trade freely with other countries
according to their comparative advantages. It is
not common situation in the real world.
 Restrictive Trade Policy. Under restrictive trade
policy, government would take number of
different actions , including taxes on some
international transactions, subsidies for other
transactions, legal limits on the value or volume
of particular imports, and many other measures
to protect the trade.
7.2 Theories supporting free trade
Theories supporting free trade including:
1. Absolute Advantage—comes from Adam
Smith
2. Comparative Advantage—comes from
David Ricardo
3. Factor Endowment Theory—comes from
Heckscher and Ohlin
All above theories support free trade. They
thought free trade would bring the most
benefit to all the countries take part in
international trade.
7.3 Arguments for protectionism
Fallacious argument 1 – “Trade restrictions
are needed to protect domestic labor
against cheap foreign labor.”
 The cost of labor is only partially determined
by wages.
 Greater productivity may more than offset the
advantages offered by low foreign wages.
Fallacious argument 2 – “Scientific tariffs
are needed so that domestic producers
can compete.”
 A scientific tariff raises the price of imports to
the domestic price.
 This does increase domestic production but it
also eliminates imports.
Questionable argument 1 – “Trade
restrictions are needed to reduce domestic
unemployment.”
 Trade restrictions may reduce imports and
lead to an expansion in the economy which
will lower unemployment in the short-run.
 This conclusion hinges on there being no
retaliation by foreign nations.
Questionable argument 2 – “ Trade
restrictions are needed to cure a balance
of payments deficit.”
 As with the previous argument, trade
restrictions may have this effect but the
conclusion hinges on a lack of retaliation by
other countries.
A qualified argument – “Infant industries
need to be protected so that they can
become established industries.”
 A new industry likely does not have the skills
and experience to be a successful competitor
in the international market place.
 To gain these skills the firm must be protected
from competition for a limited period of time.
 Qualifications
• The protection must be of limited
duration.
• A production subsidy is the lowest
cost tool for achieving this end.