Definitions
Trade Policy: A government’s policy governing international trade. Trade policies determine the tariffs and quotas that the country applies to imports and exports.Tariff: A tax levied on imported goods and services. Tariffs are used to make imported goods more expensive and less competitive compared to domestic goods.Quota: A limit on the quantity or value of goods that can be imported or exported during a specific time period.Ad Valorem Tariff: A tariff based on a fixed percentage of the value of the good or service imported.Specific Tariff: A tariff based on a specific fee for each unit (by number, weight, etc.) of the good imported.Compound Tariff: A combination of an ad valorem tariff and a specific tariff, charged on the same good.Tariff-Rate Quota: A two-tier tariff where a lower tariff rate is applied to imports up to a certain quantity, and a higher tariff rate is applied to imports that exceed this quantity.Import License: A document issued by a government authorizing the importation of certain goods into its territory.Subsidy: A government payment to a domestic producer to encourage production and reduce the cost of goods.Trade War: A situation in which countries try to damage each other’s trade by imposing tariffs or quota restrictions.Protectionism: The economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) fair competition between imports and goods and service produced domestically.World Trade Organization (WTO): An international organization designed to supervise and liberalize international trade.Trade Deficit: An economic measure of a negative balance of trade in which a country’s imports exceed its exports.Trade Surplus: An economic measure of a positive balance of trade in which a country’s exports exceed its imports.Dumping: Selling goods in a foreign market at a price that is below the cost of production or below the price in the home market.Retaliation: The imposition of additional tariffs or quotas by a country in response to tariffs or quotas imposed by another country.Trade Agreement: A treaty between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances.Economic Union: A type of trade bloc which is composed of a common market with a customs union. The participant countries have not only common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labor) but also a common external trade policy.Customs Union: A group of states that have agreed to charge the same import duties as each other and usually to allow free trade between themselves.Free Trade Area: A region where a group of countries has signed a free trade agreement, and invoke little or no price control in the form of tariffs or quotas between each other.Balance of Trade: The difference in value between a country’s imports and exports over a period of time.Comparative Advantage: The ability of a country to produce a particular good or service at a lower opportunity cost than another country.
Tariffs are taxes imposed by a government on goods and services imported from other countries.Ad Valorem Tariffs: A percentage of the value of the good that is imported.Specific Tariffs: A specific amount of money charged per unit of the good.Compound Tariffs: A combination of both ad valorem and specific tariffs.
Revenue Generation: Tariffs provide income for the government.Protectionism: Protecting domestic industries from foreign competition by making imported goods more expensive.Retaliation: Imposing tariffs in response to unfair trade practices by other countries.
Price Increase: Imported goods become more expensive, which can lead to higher prices for consumers.Consumption Reduction: Higher prices may reduce the consumption of imported goods.Domestic Industry Growth: Protection from international competition can help local industries grow.Government Revenue: Tariffs generate revenue without taxing domestic activities directly.
Trade Wars: Escalating tariff imposition can lead to trade wars, which can harm global trade.World Trade Organization (WTO): Sets rules to regulate tariffs and trade disputes between countries.
Inefficiency: Tariffs can lead to the consumption of domestically produced goods that are more expensive or of lower quality than available imports.Costly: They can increase the cost of production for domestic producers who rely on imported components.Retaliation and Escalation: Other countries may retaliate, leading to a decrease in exports.
Quotas are limits on the quantity or value of a certain good that can be imported into a country.Absolute Quotas: Limit the total quantity of goods that can be imported.Tariff-Rate Quotas: Allow a certain quantity of goods to be imported at a reduced tariff rate, after which higher tariffs apply to additional imports.
Protecting Domestic Industries: Like tariffs, quotas protect local businesses from foreign competition.Conserving Foreign Currency: Limits the outflow of foreign currency to pay for expensive imports.Managing Trade Balances: Helps to prevent trade deficits by controlling the volume of imports.
Supply Restriction: Quotas restrict the supply of imported goods, which can lead to higher prices.Market Distortion: They can create market distortions by limiting competition.Favoritism: Allocation of import licenses (in quota systems) can lead to corruption or favoritism.
Trade Agreements: Quotas are often negotiated in trade agreements as concessions by trading partners.WTO Regulations: The WTO generally discourages the use of quotas but allows them under specific circumstances.
Limited Choice for Consumers: Quotas reduce the availability of foreign products.Inefficiency and Waste: They can lead to inefficiency in production and allocation of resources.Smuggling and Black Markets: Restrictive quotas can lead to increased smuggling and black market activities.
Revenue: Tariffs generate government revenue, whereas quotas typically do not.Flexibility: Tariffs are generally more flexible and easier to adjust than quotas.Price Predictability: The impact of tariffs on prices is more predictable compared to quotas.Administrative Complexity: Quotas require a more complex administrative system to monitor and enforce.
Mark is an A-Level Economics tutor who has been teaching for 6 years. He holds a masters degree with distinction from the London School of Economics and an undergraduate degree from the University of Edinburgh.