97.1.

Discuss the main instruments of trade policy and explain how the nations decide on their trade policy.

Trade Policy Instruments

Trade Policy Uses Seven Main Instruments in International Trade

 Trade policy is a collection of rules and regulations which pertain to trade. Every nation has some form of
trade policy in place, with public officials formulating the policy which they think would be most appropriate
for their country. The purpose of trade policy is to help a nation's international trade run more smoothly, by
setting clear standards and goals which can be understood by potential trading partners. In many regions,
groups of nations work together to create mutually beneficial trade policies.

Trade policy uses seven main instruments:

1.    Tariffs
2.    Subsidies
3.    Import Quotas
4.    Voluntary Export Restraints
5.    Local content requirements
6.    Administration policy
7.    Anti dumping duties.

1) Tariff:

An import tariff is a tax collected on imported goods. Generally speaking, a tariff is any tax or fee collected by a
government. However, the term is much commonly applied to a tax on imported goods. There are two basic
ways in which tariffs may be levied:
1. specific tariffs &
2. Ad valorem tariffs.

1. Specific tariffs: 
Are levied as a fixed charge for each unit of a good imported.

2. Ad volorem Tariffs:
Are levied as a proportion of the value of the imported goods.

A tariff raises the cost f imported products. In most causes, tariffs are put in place to protect domestic
producers from foreign competiotion.

Gainers:

1. The government gains, because the tariff increases govt. revenues.

2.Domestic producers gain because the tariff affords them some protection against foreign-competitors by
increasing the cost of imported foreign goods.

Sufferers:
1.consumers suffer, because they must pay more for certain imports.

2) Subsidies:

A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants,
low-interest, tax breaks and government equity participation in domestic and government producers in two
ways:
    
1. They help producers compete against foreign imports and 
2. Subsidies help them gain export markets.

The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased
as a result of them.

3) Import Quotas:

An import is a direct restriction on the quantity of some good that may be imported into a country. This
restriction is usually enforced by issuing import licenses to a group of individuals or firms.
Import quotas are limitations on the quantity of goods that can be imported into the country during a specified
period of time. An import quota is typically set below the free trade level of imports. In this case it is called a
binding quota. If a quota is set at or above the free trade level of imports then it is referred to as a non-binding
quota.
Goods that are illegal within a country effectively have a quota set equal to zero. Thus many countries have a
zero quota on narcotics and other illicit drugs. 
There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute quotas limit the quantity
of imports to a specified level during a specified period of time. 
Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate during the
specified quota period.

4) Voluntary Export Restraints (VERs):

A voluntary export restraint is a restriction set by a government on the quantity of goods that can be exported
out of a country during a specified period of time. Often the word voluntary is placed in quotes because these
restraints are typically implemented upon the insistence of the importing nations.
Typically VERs arise when the import-competing industries seek protection from a surge of imports from
particular exporting countries. VERs are then offered by the exporter to appease the importing country and to
avoid the effects of possible trade restraints on the part of the importer. 

Example: one of the most famous examples is the limitation on auto exports to the United States enforced by
Japanese automobile producer in 1981.

Foreign producers agree to VERs because they fear for more damaging punitive tariffs or import quotas might
follow if they do not.

Benefits:
1. Both imports and quotas and VERs benefit domestic producers by limiting competition.

Sufferers:

1. VER always raises the domestic price of an imported goods, so VER do not benefit consumers.

5) Local Content Requirements:

A local content requirement is a requirement that some specific fraction of a good be produce domestically.
The requirement may be expressed either in physical terms (75% of component parts for this product must be
produced locally) or in value terms (75% of the value of this product must be produced locally). It also tends to
benefit producers and not customers. They have been used mainly in developing and developed countries. 

6) Administrative Policies:

Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a
country. In addition to the formal instruments of trade policy, govt. of all types sometimes uses informal or
administrative policies to restrict imports & boost exports. Some would agree that the Japanese are the
masters of this kind of trade barrier.
As with all instruments of trade, administrative instruments benefits producers and hurt consumers, who are
derived access to possibly superior forign products. 

7) Anti-dumping policies:

In the context of international trade, dumping is defined as selling goods in a foreign market at below their
costs of productive, or as selling goods in a foreign market at below their “fair” market value. “Fair” market
value of a good is normally judged to be greater than the costs of producing that good.