International Economics ECON 390
Lotta Moberg
Lecture notes – 9 October 1-3: The Instruments of Trade Policy
Tariffs
 A tax levied when a good is imported.
 Can be specific – a charge for each unit of imported goods.
 Can be ad valorem - a fraction of the value of imported goods.
Effective Rate of Protection
1. The change in value that firms in an industry add to the production process
when trade policy changes
The Effects of a Tariff
2. Like a transportation cost.
3. Makes the price rise in the Home market
4. The price in the Home market rises from PW under free trade to PT with the
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5.
6.
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tariff
Home producers supply more and Home consumers demand less
the quantity of imports falls
If the Home country is large, the price in the Foreign market falls.
Foreign’s exports thus fall
Costs and Benefits of Tariffs at Home
7. Hurts consumers –decreases consumer surplus
8. Benefits producers – increases producer surplus
9. Benefits the government – increases tax revenues
(Learn to illustrate this in a supply-and demand framework – and the
difference between a small and a large country)
Export Subsidy
10. Can also be specific or ad valorem.
11. Raises the price in the exporting country; decreases consumer surplus;
increases producer surplus.
International Economics ECON 390
Lotta Moberg
12. Government incurs higher expenditure
(Learn to illustrate this in a supply-and demand framework – and the
difference between a small and a large country)
Import Quota
13. A restriction on the quantity of a good that may be imported.
14. Usually enforced by issuing licenses or quota rights.
15. The government only receives revenues if it can collect quota rents
16. Raises the price of the import as the quantity demanded exceeds the
quantity supplied.
(Learn to illustrate this in a supply-and demand framework)
Voluntary Export Restraint
17. Works like an import quota
18. Officially imposed by the exporting country but usually requested by the
importing country.
19. The profits or rents from this policy are earned by foreign governments or
foreign producers.
 Foreigners sell a restricted quantity at an increased price.
Local Content Requirement
20. A regulation that requires a specified fraction of a final good to be produced
domestically.
21. In the World Trade Organization language, this is called “rules of origin”
22. For domestic producers of inputs, it is a protection, just like an import
quota.
23. From firms that must buy home inputs, it raises the price of their inputs.
24. This price rise is largely passed on to consumers.
25. The policy provides neither government revenue nor quota rents.
Other Trade Policies
26. Export credit subsidies
International Economics ECON 390
Lotta Moberg
 A subsidized loan to exporters
 U.S. Export-Import Bank subsidizes loans to U.S. exporters.
27. Government procurement
 Government agencies are obligated to purchase from home suppliers.
28. Bureaucratic regulations
 Safety, health, quality, or customs regulations.
For each trade barrier, the price rises in the Home country adopting the policy
29. Home producers supply more and gain.
30. Home consumers demand less and lose.
31. The world price falls when Home is a “large” country that affects world
prices.
32. Tariffs generate government revenue; export subsidies drain it; import
quotas may have no such effect.
33. All trade barriers create production and consumption distortions.