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International Trade Policy and Finance

Explain how governments restrict international trade and who benefits as well as who loses from the restrictions

Governments use various mechanisms in restricting international trade. They mostly undertake restrictions to protect home companies and employees from foreign firm competitions (McEachern, 2009). Some nations have infant companies that need protection due to unfair competition from developed foreign businesses. Countries use certain policies to prevent the trade of imports from other nations (Wessels, 2000). The conventional methods of regulating international trade include the use of tariffs, subsidies, embargoes, quotas, standards, and licensing requirements (McEachern, 2009).

Tariffs

They are taxes charged on goods originating from foreign countries. Taxes increase the price of imported goods (McEachern, 2009). Taxes make domestic goods more expensive, thus benefiting the local producers. Additionally, the government benefits from collecting the revenue arising from the tariffs (McEachern, 2009). Foreign businesses lose from the use of tariffs because their enterprises are restricted to the international market (Wessels, 2000). Again, domestic consumers lose because they access products at higher prices (McEachern, 2009). Taxes aimed at collecting government revenue are the revenue tariffs, while those aimed at raising the prices of foreign goods are the protective tariffs (McEachern, 2009).

Quotas

The imposition of quotas limits the number of imported commodities to certain levels. Domestic producers gain from quotas because they charge higher prices, which enables them to expand their production. Domestic consumers lose because they purchase goods at higher prices (McEachern, 2009).

Embargoes

They are restrictions aimed at preventing the movement of goods from one country to the other. In some cases, particular political reasons may call the restriction of trade between nations (McEachern, 2009).

Licenses

Several countries use both export and import licenses. Countries limit the number of issued licenses, thereby restraining trade (McEachern, 2009). Export licenses restrict trade between countries. Additionally, they control the prices of domestic agricultural commodities (McEachern, 2009).

Subsidies

Countries support local producers by giving them grants that enable them to improve their domestic productions (McEachern, 2009). Subsidies lower the production costs for domestic producers, thus allowing them to charge favorable prices for domestic goods (Wessels, 2000). Hence, local producers benefit from subsidies. In contrast, taxpayers lose from subsidies since they may or may not use the commodities (McEachern, 2009).

Standards

Governments use certain laws to restrict imports. For instance, a nation may establish certain health standards that are higher for foreign goods as compared to domestic goods (McEachern, 2009).

Because wage rates are so low in Africa, why don’t Microsoft, Cisco, and other major corporations close down their American operations and move to Africa?

Lower wage rates in Africa do not necessarily imply that American companies will benefit by closing their operations and moving to Africa (Wessels, 2000). Even in situations where essential improvements are required for cost competitiveness to aid in business survival, shifting the entire operations may not be the best solution (Wessels, 2000). The overall cost of closing down American operations such as a manufacturing facility is extremely expensive. Additionally, the costs of implementing new plant investments in Africa would be very costly for foreign corporations (Wessels, 2000).

Moreover, other hidden costs make the shifting of American businesses’ to Africa unreasonable (Wessels, 2000). Thus, the overall costs of moving American corporations to Africa would be very expensive as compared to the returns that would accrue due to the effect of a lower wage rate (Wessels, 2000).

Hence, American corporations should only think of shifting functions rather than factories. American companies would make enough savings in case they moved facilities to Africa since they would not incur start-up and shutdown costs. American corporations would reduce unit costs by shifting sourcing in Africa (Tucker, 2013). Additionally, they would increase the productivity of plants and move out low value-added activities in Africa. Thus, this would help American businesses avoid disruptive, expensive, and painful plant closures (Tucker, 2013).

Consider the foreign exchange market for the Japanese Yen and Dollars. Assume a market where the U.S. dollars are on the x-axis, as shown in the background material

Lower Rate of Interest in Japan

Individuals will have a weak incentive to invest in Japan securities, in the event that the rate of interest is low (Tucker, 2013). Hence, consumers will import fewer goods from Japan or fail to invest in Japan’s securities, thereby reducing the demand for the Japanese Yen. The decline in demand will push the price of the Yen lower, thus reducing the value of the Yen (McEachern, 2009). The supply of dollars will decrease because few people will buy the Yen. Thus, when the dollars decrease, the U.S dollar price will rise, thereby causing the dollar to appreciate (Tucker, 2013).

Lower Prices in the U.S

In the event that there are lower prices in the U.S, then this will increase the demand for the dollars. If Japan’s goods sell at higher prices in the U.S as compared to domestic commodities, then consumers will increase their demand for local products (Tucker, 2013). The need for the dollar will rise due to the increased use of domestic goods. The increase in demand for the dollars ultimately pushes its price higher, thereby rising in value (McEachern, 2009). When the demand for Japanese Yen decreases, the supply of the U.S dollars will also decrease since consumers will use less U.S dollars in buying the Japanese Yen (McEachern, 2009). As the provision of dollars reduces, the price of the U.S dollar rises, thus, causing the dollar to appreciate (Tucker, 2013).

Higher Interest Rates in the U.S

The dollar will appreciate in the event that there are higher interest rates in the United States. Increased interest rates create an incentive for investors to save in the United States (McEachern, 2009). It enables several investors to shift to U.S banks, thus increasing the value of the dollar. Additionally, this occurs because the demand for the dollar will increase (Tucker, 2013). It leads to a rightward shift of the demand curve for the dollar currency, thus causing the dollar to appreciate (Tucker, 2013).

What is the effect of a higher exchange rate on exports and imports?

A higher exchange rate implies that the currency has appreciated. It then means that greater exchange rate influences both the imports and exports. A higher exchange rate makes imports cheaper (Tucker, 2013). It happens because it costs less while importing raw materials. Furthermore, one’s currency can purchase more of the other foreign currency to buy foreign products (McEachern, 2009). Importers may turn to cheaper goods from other areas due to the effect of the appreciated rate of exchange. Thus, higher exchange rates increase the level of imports (Tucker, 2013). In contrast, exports become more expensive.

The increased prices of exports reduce their demand, thus leading to a reduced profit margin for the firm (Tucker, 2013). Additionally, the exporting company experiences reduced competitiveness in the foreign market (McEachern, 2009). Hence, higher exchange rates reduce the level of exports. Moreover, the increased imports and decreased exports reduce the aggregate demand due to the appreciated exchange rate (Tucker, 2013).

References

McEachern, W. A. (2009). Economics: A Contemporary Introduction. Mason, OH: South-Western Cengage Learning. Web.

Tucker, I. B. (2013). Survey of Economics. Mason, OH: South-Western Cengage Learning. Web.

Wessels, W. J. (2000). Economics. Hauppauge, NY: Barron’s. Web.