Definitions
Theory of Reciprocal Demand holds that demand and demand interact in international trade, but not just demand and supply. Countries trade based on their demands.
Ricardian Trade Model illustrates comparative advantages and benefits from trade in a typical equilibrium environment. The model alleges that countries opt to trade with one another due to comparative advantages.
Comparative Advantage is an evaluation of the opportunity cost of one product for other products across countries.
Factor Endowment Theory holds that states are likely to be rich in varied types of resources. Therefore, a state will enjoy a comparative advantage in products that utilize the resource with which it is greatly gifted.
Factor Price Equalization asserts that the costs of similar factors of production like wage fees will be equalized across nations due to worldwide trade in merchandise.
Stolper-Samuelson Theorem explains the correlation between comparative costs of output and comparative factor rewards.
Inter-industry specialization refers to a situation where states produce and export their products, while at the same time import products from other industries based on factor endowment.
Intra-industry specialization refers to specialization in products that belong to the same industry, such as motor vehicles. It arises when industries that produce similar products trade with each other.
Domestic production subsidy is a reimbursement made by a government to enterprises in a particular sector based on the degree of production.
Tariffs
A tariff is a toll enforced on exports and imports. There are two kinds of duties enforced on imported merchandise. These are specific tariffs and ad valorem tax. Specific tariff refers to tax charged based on an established fee per the quantity or weight of items. Ad valorem tax applies to tax that is computed as a percentage of the cost of an article.
Offshore Assembly Provision, Bonded Warehouse, and Foreign Trade Zone
Offshore Assembly Provision leads to an overstatement of protection accorded to value-added in domestic industries. Offshore Assembly Provision may lower the effective tariff rate since the tax charged on particularly imported products depends on the value of such product minus the value of integrated domestically manufactured components. Tariff levied on products stored in Bonded Warehouse depends on the nature of outputs. For the case of the Foreign Trade Zone, the effective tax rate depends on the time of appraisal. For instance, the tariff may be low if it is evaluated when products are entering the Foreign Trade Zone.
Large-nation model
According to the large-nation model, a change in tariff may affect the demand and supply of a product. An increase in tariff may influence the price of a product in the local and foreign markets. The price in an international market may decrease, benefiting the consumers. Eventually, the increase in tariff may worsen the terms of trade of a foreign country, leading to a significant loss in business. Below is a graph of the large-nation model.
Optimal tariff
An optimal tariff refers to a tariff that is intended to exploit the welfare of a nation. It is hard to achieve optimal tariff since global trade exhibits uncertainty in trading prices.
Tariff as a burden
Tariffs can be a burden to exporters because it may lower their sales volume. Tariffs may also bar exporters from the global market. On the other hand, the tariff may affect consumers’ discretionary income. It may strain consumers’ income due to an increase in the prices of products.
Comparison between tariff and quota
Protecting domestic production
A government can use anti-dumping policies, quotas, countervailing duties, and tariffs to protect national production.
International trade and labor migration
International trade can help to curb the labor movement by investing in countries that exhibit labor migration. Workers are less likely to migrate if they get favorable working conditions. For instance, workers would not migrate to the United States if they would receive better pay in their countries.