Hello, and welcome back. This session is about the tools of trade policy. I used the word tools on purpose rather than the word instruments, which is commonly used. The reason is that the instruments of trade policy consist of rules and regulations concerning export and import. Government policies aimed at the stimulation. Stimulation of international trade are however, much broader. At the end of this session, you will know the three tools of trade policy, the instruments, the negotiations and treaties that deal with those instruments; and economic diplomacy, which is the use of diplomacy to stimulate international trade and investment. You will also be able to compare the contribution of these instruments. Let's start with the instruments of trade policy. Originally, the focus of the discussion has been on tariffs. Tariffs are border taxes and have been a source of income for governments since the time of Ancient Greece. The port of Athens, for example, levied a two-percent import tax in the fourth century before Christ. Most economists agree that tariffs reduce welfare. Let's take a look at why this is the case for the case of an import tariff. We start with the basic supply and demand schedule. Domestic demand is downward sloping because at a lower price, consumers demand more. Domestic supply is upward sloping. At the intersection of supply and demand, we have equilibrium. Now, we bring imports into the picture. This is the horizontal line. This line shows that this country can import any quantity at a the world market price. At this world price level, domestic production is reduced because foreign competition drives out inefficient domestic production. Consumption increases because the market price is lower. Consumption exceeds domestic production, and the difference is import. Now, let's introduce a tariff. The tax on imports means that the price for an imported good increases. This shifts the horizontal curve up. Domestic firms get a better price and increase production, but consumers reduce consumption because the domestic price increases. You can easily check that imports are lower than without the tariff. We are now ready to check the impact of the tariff on welfare. Consumers are the big losers of the tariff. They get fewer goods and must pay a higher price. The consumer loss can be marked by the yellow area. Two sectors gains from the tariff; domestic producers and the government. Domestic firms profit from a higher price and a higher level of production. The producer gain is marked orange. Government receives taxes, that is, tariff times the quantity of imported goods, and it is marked in green. Therefore, for the economy as a whole, the big consumer loss is partly compensated by the producer gain and the tax receipts. But the compensation is not complete, as you can see from the two triangles that reflect the deadweight loss of a tariff. It is the welfare loss due to the fact that more efficient production from abroad is replaced by less efficient domestic production. In today's reading material, you will learn how to analyze quotas that are quantitative limits to importing. Tariffs have been reduced worldwide. As you can see in this graph, that has been the case for high-income countries, dotted in blue, where tariffs were already low, as well as for low and medium-income countries, that is the orange curve. Other forms of protectionism have become more important. These are the so-called non-tariff barriers or NTBs. NTBs can take many forms; subsidies, import or export quotas, voluntary export restraints, local content requirements, and administrative policies. Globaltradealert.org provides an overview of all interventions worldwide. The red line shows harmful new interventions. Trade liberalization measures are dotted in green, and the black bars show the balance of liberalization and protection. You can see how harmful tax measures increased in recent years due to the trade wars initiated by US President Trump, Brexit, and the COVID-19 measures. So far, we have focused on the instruments. The level and use of these instruments do not take place in isolation. Lower tariffs and reductions of NTBs require negotiations and treaties. These negotiations can be bilateral, regional, or multilateral. Bilateral negotiations are between two countries. Regional agreements often focus on economic integration initiatives such as the European Union, COMESA or MERCOSUR. Multilateral trade negotiations are between a great many countries from all around the world and take place under the aegis of the World Trade Organization. The Doha Round is an example of multilateral trade negotiations. Finally, there is a lot of diplomacy going on. State visits, interventions by ambassadors, consular information, and trade fairs help to position companies on foreign markets. Instruments, negotiations, and diplomacy thus determine the flows of goods and investment between countries that we will study in the next sessions. Professor Peter, you made it very clear that increasing use of instruments encourages the trade. But it also was noticed that their reduction matters as well. For instance, when it comes to negotiations, they sometimes have negative effects. Some of them could even lead to trade wars. There you're right, and that is something that we have also observed recently. The first thing that comes to mind is the unilateral tariffs by the Trump presidency. But also recently, we have seen something extraordinarily, and that is the export tariffs and export restrictions that the EU has put on vaccines against COVID-19. What about economic sanctions, for instance? Yeah, so boycotts and embargos are also an example of what you might want to call negative economic diplomacy. We will return to this issue in the session on economic diplomacy.