Chapter 7Country Focus: Trade in Hormone-Treated BeefIntroduction- Free trade: refers to a situation in which a gov’t does not attempt to restrict what its citizens canbuy from or sell to another country.Instruments of Trade Policy- Trade policy uses seven main instrumentso Tariffs: A tax levied on imports (or exports). Specific tariffs: Tariff levied as a fixed charge for each unit of a good imported ($3 per barrel of oil) Ad valorem tariffs: A tariff levied as a proportion of the value of an imported good. The gov’t gains from an IMPORT tariff because the tariff increases gov’t revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers LOSE because they must pay more for certain imports Usually pro-producer and anti-consumer Import tariffs raise domestic prices Import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. Export tariffs: raise revenue for the gov’t and reduce exports from a sector, often for political reasonso Subsidies: A gov’t payment to a domestic producer Take many forms including cash grants, low-interest loans, tax breaks, and gov’t equity participation in domestic firms.  By lowering production costs, subsidies help domestic producers in two ways (1)competing against foreign imports and (2) gaining export markets Agriculture tends to be one of the largest beneficiaries of subsides in most countries. The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result. Advocates of strategic trade policy favor subsidies to help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a few firms. They tend to protect the inefficient and promote excess production.o Import Quotas: A direct restriction on the quantity of a good that can be imported into acountry.  The restriction is usually enforced by issuing import licenses to a group of individuals or firms. For example: the US has a quota on cheese imports. The only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year. Tariff rate quota: a lower tariff rate is applied to imports within the quota than those over the quota. Ex: An ad valorem tariff rate of 10% might be levied on 1 million tons of rice imports into South Korea, after which an out-of quota rate of80% might be applied.- Common in agriculture where their goal is to limit imports over quota.o Voluntary Export Restraints: A quota on trade imposed by the exporting country, typically at the request of the importing country’s gov’t.  Most famous historical examples: limitation on auto exports to the US enforced by Japanese automobile producers in 1981.  An import quota or VER always raises the domestic price of an imported good. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent.  If a domestic industry lacks the capacity to meet demand, an import quota can raise prices for both the domestically produced and the imported good.o Local Content Requirements: A requirement that some specific fraction of a good be produced domestically.  Can be expressed in physical terms (75% of component parts for this productionmust be produced locally) Or in value terms (75% of the value of this product must be produced locally) The Buy America Act: specifies that gov’t agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. This law specifies a product as “American” is 51% of the materials by value are produced domestically. If a foreign company, or an American one for that matter, wishes to win a contract from a U.S. gov’t agency to provide some equipment, it must ensure that at least 51% of the product by value is manufactured in the US.o Administrative Policies: Bureaucratic rules designed to make it difficult for imports to enter a country. o Antidumping Duties: Selling goods in a foreign market at below their costs of productionor as selling goods in a foreign market below their “fair” market value.  The fair market value of a good is normally judged to be greater than the costs of producing that good because the former includes a “fair” profit margin. Dumping is viewed as a method by which firms unload excess production in foreign markets. Some dumping may be the result of predatory behavior, withproducers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market. Antidumping policies: are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition. If a domestic producer believes that a foreign firm is dumping production in the U.S. market, it can file a petition with two government agencies, the Commerce Department and the International Trade Commission…if a complain has a merit, the Commerce Department may impose an antidumping duty on the offending foreign imports often called, countervailing duties: Antidumping dutiesThe Case for Government InterventionPolitical Arguments for Intervention- The most common political argument for gov’t intervention is that it is necessary for protecting jobs and industries from unfair foreign competition. - Common Agricultural Policy (CAP) was designed to protect the jobs of Europe’s politically powerful farmers by restricting imports and guaranteeing prices. - Companies sometimes argue that it is necessary to protect certain industries because they are important for national security. Economic Arguments for InterventionDevelopment of the World Trading System Chapter 8Opening Case: Walmart in Japan-Most distribution is done by small trucking enterprises, often with a single truck, that have few economies of scale or scope. -There is a lack of cold storage facilities and warehouse capacity in