International Economics Assignment: Trade, Tariffs, and BOP

This report provides detailed answers to an international economics assignment, covering key concepts such as tariffs, trade policies, and the balance of payments. The report begins by defining tariffs and trade policies, differentiating between specific and ad valorem tariffs, and analyzing their positive and negative effects, supported by graphical representations. It then explores arguments for and against free trade, including examples like NAFTA, and discusses the Uruguay Round, detailing its successes (e.g., the creation of the WTO) and failures. The report also examines import substitution policies, their aims, positive and negative impacts, with real-world examples. Finally, it defines the balance of payments and its critical factors. The report offers a comprehensive overview of international economics principles and their real-world applications, providing valuable insights for students studying this subject.

Running head: INTERNATIONAL ECONOMICS
International Economics
Name of the Student:
Name of the University:
Author note:

INTERNATIONAL ECONOMICS 1
Table of Contents
Answer 1..........................................................................................................................................3
Answer i).....................................................................................................................................3
Answer ii & iii)............................................................................................................................4
Answer 2..........................................................................................................................................6
Answer i).....................................................................................................................................6
Answer ii)....................................................................................................................................7
Answer 3..........................................................................................................................................8
Answer i).....................................................................................................................................8
Answer ii)....................................................................................................................................9
Answer 4........................................................................................................................................11
Answer i)...................................................................................................................................11
Answer ii)..................................................................................................................................11
Answer iii).................................................................................................................................12
Answer 5........................................................................................................................................13
Answer i)...................................................................................................................................13
Answer ii)..................................................................................................................................14
Answer iii).................................................................................................................................15
Answer 6........................................................................................................................................16
Answer i)...................................................................................................................................16

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Answer ii)..................................................................................................................................16
Answer iii).................................................................................................................................17
Answer 7........................................................................................................................................19
Answer i)...................................................................................................................................19
Answer ii)..................................................................................................................................19
Answer iii).................................................................................................................................20
Answer 8........................................................................................................................................21
Answer i)...................................................................................................................................21
Answer ii)..................................................................................................................................21
Answer iii).................................................................................................................................22
References......................................................................................................................................23

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Answer 1
Answer i)
Tariff is defined as the tax that the government imposes on the goods and services that
are imported from other nations to raise the price of the imported goods for making those less
desirable or less competitive in comparison to the domestic goods and services. The tariff rates
are sometimes different for imports from different countries or for specific types of goods or
services which indicates the trade preference of the importing country (Feenstra et al., 2019).
Trade policy refers to the collection of different rules and regulations related to the
international trade. These policies are imposed to achieve growth and development in the
economy through international trade and gain mutual benefits with the trading partners. There
are various instruments that can be used under trade policies, such as, tariffs, subsidies, import
quota, voluntary export restraints, anti-dumping duties etc. (Yotov et al., 2016). Import tariff is a
very significant trade policy instrument, which represents a tax imposed on imported goods and
services. There are two types of import tariffs, namely, specific tariffs and Ad valorem tariffs. As
stated by Orefice (2017), specific tariffs are those that are imposed as a fixed rate on each unit of
the goods, such as, a specific tariff of $10 is imposed on each unit of an imported branded
handbag with international price of $100. This tax raises the price of the imported bag to $110 in
the domestic market and the government collects the revenue of $10 per unit of the imported
bag. Secondly, ad valorem tariffs are imposed as a fraction of the value of the imported goods
and services. Such as, when a 20% ad valorem tariff is imposed on an imported handbag with an
international price of $100, then the tariff imposed price in the domestic economy becomes $120
and the government gets a revenue of $20 on each of the imported handbag.

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SDomest
ic
Quantity
Price
PTariff
PWorld SWorld
SWorld +
Tariff
PDomestic
QDomest
ic
QST QDT
DDomes
tic
Qs QD
BA
FG
Tariff revenue
Answer ii & iii)
Positive effect of tariff is enjoyed by the government in terms of increased revenue, and
the domestic producers as the tariff is imposed to provide them protection against the foreign
competitors by raising the price of the imported goods and services. The negative effect of
import tariff is borne by the consumers as they have to pay higher price for enjoying the
imported products (Orefice, 2017).
Figure 1: positive and negative effect of import tariff
As seen from the above image, in no trade situation, the domestic demand for quantity is
QDomestic and corresponding price is PDomestic. In case of trade, supply increases at world price,
PWorld, which is lower than domestic price. At this price, domestic demand also increases for
cheaper imported goods. Without tariff, the import quantity is Qs – QD. Hence, to protect the
domestic sellers and raise revenue, the government imposes tariff on the imports, and that raises
the price to PTariff. At higher price, import supply reduces from Qs to QST, and demand also falls

5INTERNATIONAL ECONOMICS
from QD to QDT, and the import volume is QST – QDT, which is less. The rectangle ABFG
represents the revenue of the government. It can be seen that the positive effect of tariff goes to
the government and to the domestic sellers, while the negative effect falls on the consumers in
terms of higher price and less supply of imported goods.

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Answer 2
Answer i)
Arguments supporting free trade
i. Free trade enables the nations to practice specialization according to their comparative
advantage over the trading partners. Hence, it provides opportunities for efficient and
optimized resource allocation and utilization.
ii. Increased economic growth can be achieved for the countries under free trade agreement.
The economies can exchange goods and services without trade and tariff restrictions
which helps in the growth of the domestic production through transfer of advanced
technology and knowledge, and it also increases competitiveness of local industries to
enter the global market.
iii. Reduced or zero trade barriers lead to increased trade for the countries, as low cost
production is possible, resulting in higher output by the nations (Jungherr et al., 2018).
There are many free trade zones in the world, established with the aim of achieving economic
growth and development of the member countries through trade creation. NAFTA is one such
free trade agreement. It stands for North American Free Trade Agreement, which is a trilateral
trade bloc among the USA, Canada and Mexico. It is of the biggest trade blocs of the world in
terms of GDP. Due to NAFTA, the trade between the three member countries quadrupled from
$290 billion to $1.23 trillion between 1993 and 2019 (Doran & Marchildon, 2019). This boosted
economic growth and development, income and employment generation, and also lowered prices
of imported goods between the member nations due to reduced tariff, which in turn benefitted the
trade through increase of exports and imports.

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Answer ii)
Arguments against free trade
i) Free trade is not capable of bringing all-round development to the industries as by
applying the comparative advantage principle, a nation can specialize in few goods
and services only. The inefficient industries remain neglected in such cases and thus,
all over development is not possible. Furthermore,
ii) Chances of domestic industries being left out are much higher under free trade. Due
to lack of tariff, the imported goods are cheaper and hence, there may be increase in
the demand for imported goods, while the demand for domestic goods fall
substantially. This affects the domestic industries negatively.
iii) The scopes of raising revenue from import taxes reduce significantly under free trade.
Many small nations rely heavily on the import tariffs for raising revenue, however, if
there is reduced trade tariffs and taxes, then revenue is also reduced (Jungherr et al.,
2018).
Regarding NAFTA, there are some criticisms of this free trade agreement. While USA has been
taking the advantages of cheap labor in Mexico for manufacturing and in other labour intensive
industries, NAFTA is criticized for the powerful influential nations taking advantage of the poor
country. The local governments are undermined while implementing laws beneficial for their
own economy as NAFTA prevents them to impose those laws that might affect the NAFTA
benefits. Thus, even though trade volume between the member countries has increased,
individual development are not much significant or attributable to the free trade, such as,
Mexico’s GDP and GDP per capita are lower than that of Brazil and Chile. Many inefficient

8INTERNATIONAL ECONOMICS
businesses survived due to free trade agreement lowering down the overall development level
(Doran & Marchildon, 2019).
Answer 3
Answer i)
Uruguay Round represents the 8th round of the Multilateral Trade Negotiations (MTN)
that was conducted within the framework of the General Agreement on Tariffs and Trade
(GATT). It spanned from 1986 to 1993 and included 123 nations as contacting parties (Wto.org,
2020). This round covered almost all types of trade that included every type of products and
services, such as, toothbrushes to automobiles, banking services to healthcare,
telecommunications to knowledge transfer, and from genes of genetically modified agricultural
products to the treatment for AIDS. The Uruguay Round is considered to be the largest trade
negotiation in the history and of any kind (Wto.org, 2020).
The Uruguay Round were successful as it brought the biggest reform of the trading
system of the world since GATT was established at the end of World War II. Despite its early
failure, it took painstaking negotiation processes for seven years and included every aspect of
trade and every type of goods and services to be traded, and addressed all types of tariff policies
to be imposed. The major success of the Uruguay Round was the creation of World Trade
Organization (WTO) and GATT remained an integral part of the WTO agreements (European
Commission, 2013). The other success factors are:
 Trade-weighted average tariff cut of 38%
 Inclusion of new economic sectors like services under international trading system, that
is, adoption of General Agreement of trade in Services (GATS)

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 Inclusion of Agriculture trade under full GATT disciplines
 Agreement achieved on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
 Establishment of a unified dispute settlement system, known as Dispute Settlement Body
(DSB)
 Agreement is reached on Trade-Related Investment Measures (TRIMS)
 Establishment of trade Policy Review Mechanism (TPRM) (European Commission,
2013)
The guidelines were accepted by the participating countries over the
years, such as, within only two years from 1986, the participants agreed on a
package of cuts in the import duties on the tropical products, which are
primarily exported by the developing countries, and this was a huge benefit
for the developing countries. The agricultural trade and services trade were
two major success points. Prior to this round, the trade of agricultural
products were decreasing due to increased subsidies, falling world prices,
rising support cost and build-up of stocks and after this round, the terms
have been made favorable for agricultural trade (Caldas, 2018). These factors
are still being followed in today’s international trade. Under WTO regulations
as per the Uruguay Round agreements, the international trade on all types of
goods and services, such as, from consumer products to banking services
are carried on today also.
Answer ii)
The Uruguay round has been criticized for not paying sufficient attentional to the
developing countries. Moreover, the agreements made to protect the intellectual property and the

10INTERNATIONAL ECONOMICS
industrial tariffs have been found to be putting many constraints on the policy making and actual
needs. It has been observed that the developing nations lacked experience in regards to the WTO
negotiations and guidelines, and hence these economies were affected by the developed
industrial nations (McDorman, 2019). For example, the USA became major power of the GATT
and WTO, ad hence, it started showing mercantilist attitude and in today’s international trade
also, USA is a dominating force, placing embargos on various countries, such as, on Cuba, on
the basis of their political relationships in the past two decades. These aspects negatively affect
the developing nations’ growth and development through international trade and also create
imbalances in the global market. The Uruguay Round did not focus on such potential issues at
the time of creation (Finger & Nogues, 2002).

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Answer 4
Answer i)
The aim of import substitution policy is to encourage the national production. The
strategy of import substitution under the trade policy is meant to abolish the import of foreign
goods and encourage the domestic production. As stated by Cherkesova et al. (2019), the
purpose of import substitution policy is changing the economic structure of a nation by
decreasing the dependency on the foreign goods through increasing production of domestic
goods. The protection measures for the domestic producers include high tariffs and duties on
imports, restrictions through quotas, and these are applied to the fundamentally high-cost
industries. This policy is majorly adopted by the developing countries in order to boost the
domestic economic growth as well as collect higher revenue from imported goods and services.
Answer ii)
The positive effects of import substitution policy include higher self-reliance and
increased efficiency of the domestic producers. When a country imposes import substitution
policy, then the domestic manufacturers can increase their productivity, efficiency and quality of
their production which results in increased competitiveness in the global market. This also leads
to increased employment scopes for the local people and domestically produced goods are
available at a lower price. For example, Sri Lanka, the South-Asian developing economy
implemented import substitution policy in 1977 and it resulted in poverty reduction to some
extent. The garment industry benefitted mostly from import substitution policy and today, many
major economies outsource their clothing manufacturing to Sri Lanka for reducing their cost of