The political economy of trade policy International trade

Agreements, where tariffs are applied between nations, are lower than those on products from other countries.

• Preferential Trading Agreements

• Free Trade Area

• Trade Diversion

• Trade Creation

Zone in which each country's goods can be shipped to each other without tariffs, but in which they set tariffs against the outside world independently.

• Customs Union

• Free Trade Area

• Trade Diversion

• Common Market

Union wherein countries must agree on tariff rates.

• Common Market

• Customs Union

• Trade Diversion

• Free Trade Area

While it is the best interest of the group as a whole to press for favorable policies, it is not in any individual's interest to do so.

• Theory Of The Second Best

• Solidary Benefits

• Prisoner's Dilemma

• • Collective Action Problem

When a given market in a country is not performing adequately (ex: labor market is not clearing)

• Trade Creation

• Trade Diversion

• Domestic Market Failures

• • Free Trade Area

A provisional set of rules on trade policy created by 23 countries in 1947

• Trade creation

• General Agreement on Tariffs and Trade (GATT)

• World trade organization (WTO)

• North American free trade agreement (NAFTA)

Producers and consumers allocate resources most efficiently when gov'ts do not distort market prices through trade policy.

• Free Trade Area

• Political Argument for Free Trade

• Efficiency Case for Free Trade

• • Trade Diversion

When the terms of trades benefits outweigh the cost of a tariff (decrease price of imports)

• Optimum Tariff

• Trade Diversion

• Trade Creation

• • Terms of Trade Argument for a Tariff

Which of the following is a consequence of subsidies

• Tariffs

• It benefits domestic producers by limiting import competition

• Reduce the incentive for innovation

• Subsidies protect inefficient domestic producers

Which of the following observations about subsidies is true?

• It may invite retaliation and trigger a trade war

• Government subsidies must be paid for, typically by taxed individuals and corporations

• Conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise

• Export tariffs are used to raise revenue for the government