Six Sigma Case Study

INTRODUCTION TO TRADE POLICY MEASURES[pic 1]

[pic 2]

Lecture 6

So far…[pic 3]

• Mercantilism.. 16th- 17th Cen..

• Adam Smith (1776)– Theory of Absolute Advantage:

• Ricardo (1817) – Theory of Comparative Advantage

• H-O Theory – Comparative Adv based on Factor Endowments

• Vernon (1960s) – Product Life Cycle Theory

• Krugman (1970s) – New Trade Theory

• Porter’s Diamond Theory

Case for Managing Trade…[pic 4]

• There are major gains from trade under the assumptions made in the theoretical models, but

• Some of the assumptions may be invalid

• Full employment, perfect competition, CRS, free movement of workforce between industries etc.

• The static trade models may not be optimal for long term development strategy

• The income distribution issues may become more important from policy making perspective

• There is a concern that countries may be stuck with comparative advantage in sectors with little productivity growth

• By standard and static comparative advantage theory, developing countries should always be producing low value labour intensive items

• Imperfect competition indicates that head starts are very important for maintaining advantage-

• This seriously handicaps latecomers

• Trade instruments are sometimes also important to protect domestic economy from price volatility of the international market.

Reasons for using trade barriers like tariff[pic 5]

• Income distribution

• trade usually has very strong effects on income distribution within countries. Policy measures often reflect relative power of different interest groups within countries, rather than some measure of overall national interest. This is often the main determining factor in government policies toward international trade.

• Promotion of industries important for economy

• Infant industry promotion or protection of strategic industries from foreign competition

• Balance of Payments

• Some countries have restricted trade/imports due to BOP problems like large and unsustainable current account deficit.

• Raise revenue

Other forms of Conventional Trade Measures[pic 6]

• Food and Health standards

• Technical standards

• Anti-dumping duties

• Countervailing duties

More modern Trade barriers/Measures

• Trade related intellectual Property rights

• Government Procurement

• Capital control related measures

• Competition policy

• Trade facilitation

IMPORT QUOTAS AND TARIFFS[pic 7]

• import quota Limit on the quantity of a good that can be imported.

• tariff   Tax on an imported good.

[pic 8]

Import Tariff or Quota That Eliminates Imports

In a free market, the domestic price equals the world price Pw.

A total Qd is consumed, of which Qs is supplied domestically and the rest imported.

When imports are eliminated, the price is increased to P0.