Handbook on International Trade Policy
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Handbook on International Trade Policy

Edited by William A. Kerr and James D. Gaisford

The Handbook on International Trade Policy is an insightful and comprehensive reference tool focusing on trade policy issues in the era of globalization. Each specially commissioned chapter deals with important international trade issues, discusses the current literature on the subject, and explores major controversies. The Handbook also directs the interested reader to further sources of information.
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Chapter 16: Trade Distortion: Border Measures versus Domestic Support

James Gaisford


James Gaisford Introduction Governments intervene in markets in wide-ranging ways and most of these interventions, either by design or accident, affect international trade. This chapter provides an overview and primer on how two broad types of policy intervention affect national and international markets. First, we analyze border or international trade measures such as import tariffs and export subsidies, which directly alter or distort international trade flows. Second, we investigate domestic support measures such as production subsidies, which directly affect firms on the supply side of the market and indirectly affect trade flows. Subsequent chapters provide a detailed treatment of many types of border measures and domestic support measures. For simplicity, we focus on competitive markets although most of the key insights that are developed carry over to more complex situations with imperfect competition. For ease of exposition, we adopt a single market or partial equilibrium approach where the international market that we examine is assumed to have a negligible impact on the rest of the world economy.1 Policy interventions in markets tend to have pervasive effects on the consumption and production decisions of households and firms. Trade flows, whether imports or exports, subsequently will be affected. Rational consumers will choose the quantities they consume such that the additional or marginal benefit is equal to the price. Consequently, a policy-induced increase in the price facing consumers will necessarily reduce the quantities that consumers demand, and ultimately, either reduce imports or increase exports as...

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