Political Economy of Trade Policy

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Questions and Answers

Which argument for protectionism suggests that emerging industries require temporary support to become competitive?

  • Job Protection
  • Infant Industry Argument (correct)
  • Cultural Preservation
  • National Security Argument

Protecting cultural industries from foreign dominance is an example of a job protection argument.

False (B)

What is one of the tools of trade policy used to increase the price of imported goods?

Tariffs

Certain industries essential to national security, such as ________, must be protected by the government.

<p>defense</p> Signup and view all the answers

What is a non-tariff barrier (NTB)?

<p>Regulatory measures restricting imports (A)</p> Signup and view all the answers

Match the following tools of trade policy with their descriptions:

<p>Tariff = A tax on imported goods Quota = Limit on the quantity of goods imported Subsidy = Financial support to domestic industries Anti-Dumping Duties = Taxes on cheap foreign goods</p> Signup and view all the answers

Job protection measures can lead to greater efficiency in the economy.

<p>False (B)</p> Signup and view all the answers

What is one reason governments may impose tariffs?

<p>To protect domestic industries</p> Signup and view all the answers

What is one of the main benefits of free trade?

<p>Promotes efficient resource allocation based on comparative advantage (B)</p> Signup and view all the answers

Protectionism typically lowers consumer prices.

<p>False (B)</p> Signup and view all the answers

What was a key consequence of the U.S.-China trade war?

<p>Disruption of global supply chains</p> Signup and view all the answers

The European Union’s Common Agricultural Policy provides ______ to farmers.

<p>subsidies</p> Signup and view all the answers

Match the following trade policy tools with their descriptions:

<p>Tariffs = Taxes on imported goods Quotas = Limits on the quantity of imports Subsidies = Financial support to domestic industries Export incentives = Encouragement for domestic producers to sell abroad</p> Signup and view all the answers

What argument supports the use of protectionism for emerging industries?

<p>Infant industry argument (C)</p> Signup and view all the answers

Lobbying has no significant impact on trade policy decisions in democratic systems.

<p>False (B)</p> Signup and view all the answers

Name one disadvantage of using tariffs as a trade policy tool.

<p>Increased costs for consumers</p> Signup and view all the answers

Flashcards

Political Economy of Trade Policy

Trade policies are influenced by both economic goals (like promoting efficiency) and political considerations (like protecting domestic industries).

Protectionism

Governments sometimes impose restrictions on trade to protect domestic industries from foreign competition, even though it can lead to higher prices for consumers.

Infant Industry Argument

This argument suggests that emerging industries need temporary protection from foreign competition to grow and become competitive.

National Security Argument

Protecting certain industries like defense or energy which are crucial for national security.

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Tariff

A tax imposed on imported goods to make them more expensive, effectively protecting domestic producers from foreign competition.

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Quota

A limit on the quantity of a specific good that can be imported into a country.

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Subsidy

Financial support provided to domestic industries to lower production costs and make them more competitive.

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Non-Tariff Barriers (NTBs)

Regulatory measures like technical standards, licensing requirements, or health/safety regulations that restrict imports, even without direct tariffs or quotas.

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Strategic Trade Policy

Government policies aimed at promoting specific industries within a country, often through subsidies, tax breaks, or export incentives, to boost their competitiveness and economic growth. This strategy aims to help these industries gain a foothold in global markets or to protect them from foreign competition.

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Free Trade

A trade policy where countries allow the free flow of goods and services across borders without imposing tariffs or quotas. This approach encourages specialization, lowers prices for consumers, and promotes efficiency.

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Trade War

A trade conflict between two or more countries arising from protectionist policies. This occurs when countries impose retaliatory tariffs or other trade barriers on each other's goods, escalating trade tensions.

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Lobbying and Trade Policy

The practice of influencing government policies in favor of specific industries or groups, often through lobbying and campaign contributions. This can significantly impact trade policy decisions, sometimes at the expense of broader economic interests.

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Study Notes

Political Economy of Trade Policy

  • Trade policy is influenced by economic and political factors, creating trade-offs between free trade and domestic protection.
  • Key influences include: domestic industry economics, political lobbying, and national security concerns.

Arguments for Protectionism

  • Infant Industry: Temporary protection for new industries until they become competitive. A risk exists for prolonged reliance on protection.
  • National Security: Protecting crucial industries (e.g., defense) for national security reasons.
  • Job Protection: Protecting domestic jobs by restricting imports. This approach may lead to inefficiencies and higher costs for consumers.
  • Retaliation: Imposing tariffs to counter unfair trade practices (dumping, subsidies).
  • Cultural Preservation: Maintaining national identity by protecting cultural industries.

Tools of Trade Policy

  • Tariffs: Taxes on imported goods, increasing their cost for consumers.
  • Quotas: Limits on the quantity of imported goods.
  • Subsidies: Financial support for domestic industries, lowering their costs.
  • Non-Tariff Barriers (NTBs): Regulations like standards, licensing, and safety measures restricting imports.
  • Anti-Dumping Duties: Tariffs on goods sold below fair market value.

Political Influences on Trade Policy

  • Lobbying: Industries benefitting from protectionism advocate for trade barriers.
  • Public Opinion: Public concern over job losses influences support for protectionism.
  • Strategic Trade Policy: Promoting promising industries through subsidies or export incentives.

Free Trade vs. Protectionism

  • Free Trade Benefits: efficient resource use, greater consumer choice, lower prices, innovation.
  • Protectionism Costs: less efficient use of resources, higher consumer prices, potential for trade wars.

Case Studies in Trade Policy

  • U.S.-China Trade War: Tariffs imposed by the US on Chinese goods, leading to retaliatory measures, affecting global supply chains.
  • EU Common Agricultural Policy (CAP): Subsidies to EU farmers impacting global agricultural markets.
  • U.S. Steel Tariffs: Protecting domestic steel producers, but increasing costs for industries reliant on steel.

Key Insights for Exam Preparation

  • Understand various protectionist arguments and supporting examples.
  • Relate tools of trade policy (tariffs, quotas) to their economic effects.
  • Analyze trade policy case studies like the US-China trade war and the EU CAP.

Quiz Questions

  • Identify key arguments for protectionism and provide specific examples.
  • Compare and contrast tariffs and quotas as trade tools.
  • Explain how interest group lobbying impacts trade policy.
  • Discuss the U.S.-China trade war's motivations and outcomes.

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