Trade Policy


The previous lectures indicate that, at the country level, an economy is in general better off when trading. However, the gains o trade are not euqally shared among all citizens. For instance, trade liberalization may benefit consumers by reducing the cost of the goods they want to consume, but at the same time hurt the local producers of these very same products, who now face international competition. Moreover, although it may be posible for the winners to compensate the losers and still be better off (after all, trade is usually Pareto efficient), such implementation is nearely impossible. For instance, it would require that all consumers of imported goods pay a “tax” to the loosing industries, which is expensive to implement. Since the losers are typically less and can coordinate more easily, in general they successfully block trade liberalization. After all, the general public who would benefit gains very little, and thus is not that much concerned.

We can classify trade policy tools in two broad categories, depending on whether they act upon prices or quantities

  • Trariff barriers
  • Non-tariff barriers.

In general, protection against foreign trade appears in the form of tariffs, a tax that an importer thas to pay to ship the goods into the country. Throughout this section, we will use partial equilibrium analyse the changes induced by the different trade policies. We are going to analyse:

  • Tariffs
  • Export subsidies
  • Liaison mechanism
  • Export tariffs
  • Import quotas