International Trade Policy Unit Four: International Trade Policy

Goals Define a fixed-rate and a floating exchange system and describe the advantages and disadvantages of each. List the positives of the two primary trade policies.

Advantages: More stability in currency and trade is easier. I. Fixed-Exchange Rate Defined: Each country tries to keep the value of its currency constant against one another Advantages: More stability in currency and trade is easier. Disadvantages: distorts trade patterns, discrimination among importers, reduces freedom, black market rates develop.

II. Floating Exchange Rate Defined: Exchange rates are determined by supply and demand Advantages: More freedom, balance between trade and balance of payments. Disadvantages: Uncertainty, trade may be worsened by depreciation, unstable rates can destabilize the economy.

III. Trade Policies Positives of Protectionism Shield developing industries Fosters competition domestically Promote industries that are essential to national security Positives of Free Trade Incentive for domestic manufacturers to be efficient Gains from comparative advantage Fosters competition abroad Protectionism: restrict international trade; ensures fair competition between domestic goods and imports; Free trade: government barriers at a minimum A country can be protectionist with certain industries while having no barriers with others Protectionism: keep prices regulated; not dependent upon other nations for goods; there’s more to be gained from comparative advantage than losses from international competition; linked as a contributing factor to international warfare; trade redistributes jobs, doesn’t make them disappear We should have some kind of self-sufficiency, without being isolated

Import Quotas Tariffs III. Trade Policies Limit on the number of certain goods brought in for sale Tariffs A tax on imports or exports Farm Bill in 1981 put limits on the import of sugar; the limits have remained the same, regardless of a change in demand or population; part of the reason corn syrup and artificial sweeteners are popular among producers; 127% tariff on paper clips made elsewhere; protects the paperclip industry domestically; nobody complains because they are still very cheap Smoot-Hawley Tariff Bill of 1930: higher trade tariffs; meant to stimulate economy and save jobs; less imports meant less money for foreigners to spend on our exports; trade decreased; unemployment increased; revenue tariffs are modest; protective tariffs are higher; doesn’t necessarily stop the import but decreases