The Instruments of Trade Policy
Previous chapters have answered the question, “Why do nations trade?” by
describing the causes and effects of international trade and the functioning
of a trading world economy. While this question is interesting in itself, its
answer is even more interesting if it also helps answer the question, “What should
a nation’s trade policy be?” For example, should the United States use a tariff or
an import quota to protect its automobile industry against competition from
Japan and South Korea? Who will benefit and who will lose from an import
quota? Will the benefits outweigh the costs?
This chapter examines the policies that governments adopt toward international
trade, policies that involve a number of different actions. These actions
include taxes on some international transactions, subsidies for other transactions,
legal limits on the value or volume of particular imports, and many other
measures. The chapter thus provides a framework for understanding the effects
of the most important instruments of trade policy.
LEARNING GOALS
After reading this chapter, you will be able to:
• Evaluate the costs and benefits of tariffs, their welfare effects, and winners
and losers of tariff policies.
• Discuss what export subsidies and agricultural subsidies are, and explain
how they affect trade in agriculture in the United States and the European
Union.
• Recognize the effect of voluntary export restraints (VERs) on both importing
and exporting countries, and describe how the welfare effects of these VERs
compare with tariff and quota policies.
Previous chapters have answered the question, “Why do nations trade?” by
describing the causes and effects of international trade and the functioning
of a trading world economy. While this question is interesting in itself, its
answer is even more interesting if it also helps answer the question, “What should
a nation’s trade policy be?” For example, should the United States use a tariff or
an import quota to protect its automobile industry against competition from
Japan and South Korea? Who will benefit and who will lose from an import
quota? Will the benefits outweigh the costs?
This chapter examines the policies that governments adopt toward international
trade, policies that involve a number of different actions. These actions
include taxes on some international transactions, subsidies for other transactions,
legal limits on the value or volume of particular imports, and many other
measures. The chapter thus provides a framework for understanding the effects
of the most important instruments of trade policy.
LEARNING GOALS
After reading this chapter, you will be able to:
• Evaluate the costs and benefits of tariffs, their welfare effects, and winners
and losers of tariff policies.
• Discuss what export subsidies and agricultural subsidies are, and explain
how they affect trade in agriculture in the United States and the European
Union.
• Recognize the effect of voluntary export restraints (VERs) on both importing
and exporting countries, and describe how the welfare effects of these VERs
compare with tariff and quota policies.
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