3. International Trade Policies
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3. International Trade Policies
Lecture outline
 What is Free trade
 What is protectionism?
 Why trade protection?
 How trade protection involve?
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3. International Trade Policies
 Dear students , in the previous chapter we have seen
different trade theories. The conclusion of all the trade
models presented so far is that free trade leads to the
most efficient use of world resources
 When nations specialize according to the comparative-
advantage principle, the level of world output is
maximized. Not only does free trade enhance world
welfare, but it can also benefit each participating nation.
 Free trade is a policy formed between two or more nations
that permits the unlimited import or export of goods or
services between partner nations.
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International Trade Policies
 Free trade generally allows each nation to consume a
combination of goods that exceeds the best it can
produce in isolation.
 However, free-trade policies meet major resistance
among those 'companies and workers who face losses
in income and jobs because of import
competition. Most of the time, policy makers face
dilemma between the appeal of greater global
efficiency made possible by free trade and the
needs of the public whose main desire is to preserve
short-run interests such as employment and
income.
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International Trade Policies
 The benefits of free trade may take years to achieve and are
spread out over wide segments of society, whereas the costs
of free trade are immediate and fall on specific groups (for
example, workers in the import-competing industry).
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3. International Trade Policies
Concepts of Protectionism
 Protectionism is a movement in the direction of autarky due to a
new trade policy which further restricts the free flow of goods
and services between countries.
 Protection implies granting a protective cover to the home
industries against foreign competition either by imposing duties on
the foreign goods or by helping the domestic industries by giving
subsidies and making raw materials available at subsidized
prices.
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3. International Trade Policies
Protection of industries may involve:
 Levying of import duties which may raise price of foreign
goods relative to domestic goods
 Fixing of quotas or posing of non-tariff restrictions, which
make the entry of cheap foreign goods difficult or
impossible
 Granting of subsidies or reward to the domestic industries
to enable them to compete with cheap foreign goods.
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3. International Trade Policies
Arguments in Support of Protection Policy
a. Infant industry argument

infant industries should be protected against foreign
competition. Free trade among unequal is not at all desirable.
b. Diversification of industries argument

Protection helps in the diversification of industries in a
country and reduces risk.
c. Employment argument

protection stimulates economic activity and raises the
level of employment in the country.
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3. International Trade Policies
d. Terms of trade argument

secure larger gains from international trade. Imposition of tariffs
raises the price of imports and decreases demand for imported
goods
e. Bargaining argument

increases the bargaining power of the country in international trade. It
means that if tariffs are imposed by a country, it can force other
countries to lower their tariff duties and thus enable that country to
obtain favorable terms for its exports from other countries
f. Balance of Payments Arguments

removing the disequilibrium in balance of payments. correct the imbalance
in the balance of payment a country by imposing tariffs can have an
excess of exports over imports and will thus earn more foreign
exchange.
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3. International Trade Policies
g. Anti-dumping argument

Dumping means that the foreign country dumps the
domestic market with its goods at a very low price. It ruins
the competing firms in the importer country.
h. Revenue Argument

imposition of tariff protects the home industries as well as brings
revenue to the government.
i. Capital formation argument

Protection can also lead to the promotion of capital formation by
increasing the saving ratio in the country
j. Self-sufficiency argument
K. Basic industry argument
L. Maintaining high wage argument
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3. International Trade Policies
n. Defense argument
o. Nationalist argument
p. Preservation argument
Arguments against Protection
 Loss of revenue
 Uneconomic use of resources
 Prevents industrial growth
 Producers become lethargic
 No increase in the level of employment
 Loss to consumers
 Unequal distribution of income
 Creation of monopolies
 Tariff wars.
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3. International Trade Policies
Means of Trade Restriction
1. Tariffs
2. Quotas
3. Subsidies
Tariff
 Tariff refers to a tax or duty levied by the government of a
country on goods and services entering foreign trade.
 A tariff is simply a tax (duty) levied on a product when it
crosses national boundaries.
 The most widespread tariff is the import tariff, which is a
tax levied on an imported product.
 A main objective of an import tariff is to protect domestic
producers from foreign competition. By increasing the domestic
price of an import, a tariff serves to make home-produced goods
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more attractive to domestic consumers
3. International Trade Policies
 A less common tariff is an export tariff, which is a tax
imposed on an exported product.
 Export tariffs have often been used by developing nations
Why tariff?
 Tariffs are imposed for two reasons: Protection or
revenue purposes
 A protective tariff is designed to protect importcompeting producers from foreign competition.
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3. International Trade Policies
 A protective tariff generally is not intended to totally
prohibit imports from entering the country, but rather
it is used to place foreign producers at a
competitive disadvantage when selling in the
domestic market.
 A revenue tariff, on the other hand, is imposed for
the purpose of generating tax revenues for the
government and may be imposed on either exports
or Imports.
 Revenue tariffs are more common in developing
nations than developed nations.
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3. International Trade Policies
Types of Tariff
 Specific Duty. It is a fixed sum of money imposed as a
duty on a commodity according to its weight or
measurement (physical dimensions) as Birr. X per unit
or per meter or per liter, etc.

Example: For example, an Ethiopian importer of a
German’s harvesting machines may be required to pay
a duty to the Ethiopian government of birr 1000 per
machines , regardless of the machines' price.
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3. International Trade Policies
 Ad valorem Duty. It is imposed as a percentage of the
value of the imported commodity.
 The value is inclusive of insurance plus freight charges, that is,
cost of the commodity plus insurance, represent the total value
of a commodity on which, the duty is charged.
o For example, an Ethiopian importer of harvest machine
may be required to pay a duty of 50% of the price of the
machine to the Ethiopian government.
 Compound Duty. A combination of both specific and ad
valorem duties is a compound duty levied on a commodity.

For example, an Ethiopian importer of a harvesting machine
might be required to pay a duty of birr 1500 plus 35 percent of the
value of the machine.
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3. International Trade Policies
 Sliding Scale Duty. It is levied on the basis of the price
of the imported commodity rising and falling with an
increase or decrease in the price. It can be specific or ad
valorem but mostly it is specific.
Quotas
 Quotas are a device under which limit is fixed in respect of
either the value or the quantity of a commodity that may be
imported or exported by a country during a specified period
of time, usually one year.
 The prime objective is the quick and effective regulation
of imports and exports.
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3. International Trade Policies
Import quotas are often used to protect: i) domestic
industries from foreign competition; or ii) to correct
a disequilibrium in the balance of payments; or iii)
for commercial bargaining; or iv) to execute barter
deals with different countries.
Export quotas may be used for (i) equitable
distribution of scarce export, ii) regulation of
exports of essential raw materials; or iii) to execute
international export agreements.
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3. International Trade Policies
Types of quotas
1. Tariff Quotas/custom quota: allow the imports of a
specified quantity of a commodity either duty free or at a very
low duty. Beyond this limit a high rate of duty is charged.
2. Unilateral Quotas: under unilaterally fix a quantity or value
of a commodity either through legislation or by decree that
can be imported. It is global if a specific commodity can be
imported from any part of the world.

This limit is fixed without any prior negotiation or
agreement with the foreign countries
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3. International Trade Policies
o The unilateral quota can be broadly of two types – (a)
global quota and (b) allocated quota.
•
Global quota:- the entire quantity to be imported may
be obtained from any one or more countries during the
specified period.
•
Allocated quota system :- the total quantity of
import quota is allocated or distributed among the
different exporting countries on the basis of certain
criteria.
3. Bilateral Quotas: In case of the bilateral quota system, the
import quota is fixed after negotiations between the
importing and exporting countries.
 It is also called as agreed quotas.
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3. International Trade Policies
4. Mixing Quotas/ indirect quota: The domestic producers
in the quota-fixing country are required to make use of
domestic raw materials along with the imported raw
material in a specified proportion.
Subsidies
o National governments sometimes grant subsidies to their
producers to help improve their trade position. By providing
domestic firms a cost advantage, a subsidy allows them to
market their products at prices lower than warranted by
their actual cost or profit considerations.
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3. International Trade Policies
 Governmental subsidies assume a variety of forms, including:
 Out
right cash disbursements(direct money payments to
the producers)
 Tax concessions
 Insurance arrangements, and
 Loans at below- market interest rates
o Two types of subsidies:
1. Domestic subsidy: which is sometimes granted to producers
of import-competing industries and
2. Export subsidy : which goes to producers of goods that are to
be sold overseas
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3. International Trade Policies
Dumping and Anti-dumping strategies
o Dumping
is a form of international price discrimination. It
occurs when foreign buyers are charged lower prices than
domestic buyers for an identical product
 Selling in foreign markets at a price below the cost of
production is also considered as dumping.
Forms of dumping
1. Sporadic dumping (distress dumping)
 This occurs when a firm disposes of excess inventories on
foreign markets by selling abroad at a lower price than at
home.
 This form of dumping may be the result of misfortune or poor
planning by foreign producers.
 Unforeseen changes in demand and supply conditions can
result in excess inventories and thus dumping.
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3. International Trade Policies
 Although
sporadic dumping maybe beneficial to
importing consumers, it can be quite disruptive to
import –competing producers, who face falling sales
and short-run losses.
2. Predatory dumping
 This occurs when a producer temporarily reduces the
prices charged abroad to drive foreign competitors out
of business. When the producer succeeds in acquiring a
monopoly position, prices are then raised to
commensurate with its market power. The new price level
must be sufficiently high to offset any losses that occurred
during the period of cutthroat pricing.
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3. International Trade Policies
 The firm would presumably be confident in its ability to
prevent the entry of potential competitors long enough for it to
enjoy economic profits.
 Although predatory dumping is a theoretical possibility,
economists have not found empirical evidence that supports its
existence.
3. Persistent dumping
 As its name suggests, persistent dumping goes on indefinitely.
 In an effort to maximize economic profits, a producer may
consistently sell abroad at lower prices than at home
 Therefore, Home governments are generally concerned about
predatory pricing for monopolizing purposes and may retaliate
with antidumping duties that eliminate the price
differential.
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