GOVERNMENT CONTROLS OVER TRADE
Tariffs: import duties or taxes imposed on goods
entering the customs territory of a nation
revenue collection, protection of domestic industry,
Protectionism: Logic and Illogic
Countries use protectionist measures to shield a country’s markets
from intrusion by foreign competition and imports.
Arguments for Protectionism include:
1. maintain employment and reduce unemployment.
2. increase of business size, and
3. protection of the home market.
4. need to keep money at home.
5. encouragement of capital accumulation.
6. maintenance of the standard of living and real
7. conservation of natural resources.
8. protection of an infant industry
9. industrialization of a low-wage nation
10. national defense
Certain industries need protection
Imports may not be available during wartime
Prevent valuable technologies from being used to strengthen
competition, especially militarily
Protect Infant or Dying Industry
In the long run will have a comparative advantage
Meant to be temporary for emerging industry or to protect
jobs of dying industry
Protect Domestic Jobs from Cheap Foreign Labor
Productivity per worker greater in developed countries
Scientific Tariff or Fair Competition
Bring cost of imported goods up to domestically
produced goods to prevent unfair advantage
Import restrictions placed by another country may result
in similar restrictions by domestic government
The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to Increase:
1. Inflationary pressures
2. Special interests’ privileges
3. Government control and political considerations in economic
Tariff Barriers tend to Weaken:
1. Balance-of-payments positions
2. Supply-and-demand patterns
3. International relations (they can start trade wars)
Tariff Barriers tend to Restrict:
1. Manufacturer’ supply sources
2. Choices available to consumers
Three types of monetary barriers include:
1. Blocked currency: Blockage is accomplished by refusing
to allow importers to exchange its national currency for the
2. Differential exchange rates: It encourages the
importation of goods the government deems desirable and
discourages importation of goods the government does not
want by adjusting the exchange rate. The exchange rate for
importation of a desirable product is favorable and vice-
3. Government approval: In countries where there is a
severe shortage of foreign exchange, an exchange permit
to import foreign goods is required from the government
(2) Customs and Administrative Entry Procedures:
1. Valuation systems
2. Antidumping practices
3. Tariff classifications
4. Documentation requirements
(1) Specific Limitations on Trade:
2. Import Licensing requirements
3. Proportion restrictions of foreign to domestic goods (local content
4. Minimum import price limits
1. Intergovernmental acceptances of testing methods and standards
2. Packaging, labeling, and marking
(4) Government Participation in Trade:
1. Government procurement policies
2. Export subsidies
3. Domestic assistance programs
Dumping - is the export of a commodity at below cost
or at least the sale of a commodity at a lower price
abroad than domestically.
Dumping is the selling of a product abroad for less than
The average cost of production in the exporting nation
The market price in the exporting nation
The price to third countries
Cyclical or seasonal factors
Attempt to force domestic producers out of business
Dumping is classified as either:
1) Persistent Dumping (or international price discrimination): is
the continuous tendency of a domestic monopolist to
maximize total profits by selling the commodity at a higher
price in the domestic market than internationally (where it
must meet the competition of foreign producers).
2) Predatory Dumping: is the temporary sale of a commodity at
below cost or at a lower price abroad in order to drive foreign
producers out of business, after which prices are raised to
take advantage of the newly acquired monopoly power
3) Sporadic Dumping: is the occasional sale of a commodity at
below cost or at below price abroad than domestically in
order to unload an unforeseen and temporary surplus of the
commodity without having to reduce domestic prices.
Domestic producers demand protection against any
type of dumping, so they discourage imports and
increase their own production and profits.
Examples: Japan was accused of dumping steel and
TV sets in the US, while European nations were
accused from dumping cars, steel and agricultural
When dumping is proved, the violating nation or firm
usually choose to raise prices rather than face
1. GATT created as an agency to serve as watchdog over world
trade and provide a process to reduce tariffs
2. GATT also provided a mechanism to resolve trade disputes
GATT covers three basic areas:
1. trade shall be conducted on a nondiscriminatory basis;
2. protection shall be afforded domestic industries through customs
tariffs, not through such commercial measures as import quotas;
3. consultation shall be the primary method used to solve global
3. GATT now replaced by the World Trade Organization
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
1. It sets many rules governing trade between its 132
2. WTO provides a panel of experts to hear and rule on
trade disputes between members, and, unlike GATT,
issues binding decisions
Unlike GATT, is an institution, not an agreement
The International Monetary Fund (IMF)
1. IMF was created to assist nations in becoming and remaining
2. It assists countries that seek capital for economic development
3. IMF loans come with stipulations that borrowing countries slash
spending and impose controls to curb inflation
4. It helps maintain stability in the world financial markets
Objectives of the IMF include:
1. stabilization of foreign exchange rates
2. Facilitate international trade
3. lend money to members in financial trouble
The world is moving toward more free trade.
There are many communities and groups that monitor and
International Economic Communities reduce trade barriers
and promote regional economic cooperation.
Free-trade area: Members trade freely among selves without tariffs or
Customs union: Establishes a uniform tariff structure for members’
trade with nonmembers.
Common market: Members bring all trade rules into agreement.
North American Free Trade Agreement (NAFTA)
• World’s largest free-trade zone: United States, Canada, Mexico.
• U.S. and Canada are each other’s biggest trading partners.
Central America-Dominican Republic Free Trade Agreement (CAFTA)
• Free-trade zone among United States, Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, and Nicaragua.
• $33 billion traded annually between U.S. and these countries.
• Best-known example of a common market.
• Goals include promoting economic and social progress, introducing
European citizenship as complement to national citizenship, and
giving EU a significant role in international affairs.
International Economic Communities
Voluntary export restraints
Comparison of an Import Quota to an Import Tariff
Social dumping, Environmental dumping, Cultural
Department of Commerce: