CHAPTER 7
THE POLOTICAL ECONOMY OF INTERNATIONAL TRADE
INSTRUMENTS OF TRADE POLICY: Tariffs
Taxes levied on imports that effectively raise the cost of imported products
relative to domestic product.
Specific tariffs - levied as a fixed charge for each unit of a good imported
Ad valorem tariffs - levied as a proportion of the value of the imported good
Tariffs -
increase government revenues
force consumers to pay more for certain imports
are pro-producer and anti-consumer
reduce the overall efficiency of the world economy
INSTRUMENTS OF TRADE POLICY:
Subsidies
Government payments to domestic producers.
Subsidies help domestic producers to:
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of
subsidies.
INSTRUMENTS OF TRADE POLICY: Import
Quotas
Restrict the quantity of some good that may be imported
into a country.
Tariff rate quotas - a hybrid of a quota and a tariff
where a lower tariff is applied to imports within the
quota than to those over the quota.
Voluntary Export Restraints - quotas on trade imposed
by the exporting country, typically at the request of the
importing country’s government.
A quota rent - the extra profit that producers make
when supply is artificially limited by an import quota.
ARGUMENTS FOR GOVT. INTERVENTION
There are two main arguments for government intervention in the
market:
1. Political arguments - concerned with protecting the interests of
certain groups within a nation (normally producers), often at
the expense of other groups (normally consumers)
2. Economic arguments - concerned with boosting the overall
wealth of a nation – benefits both producers and consumers
GOVERNMENT INTERVENTION: Political
Arguments
1. Protecting jobs
2. Protecting industries deemed important for national security
3. Retaliating to unfair foreign competition - when governments take or threaten to take
specific actions, other countries may remove trade barriers. EXAMPLE: The U.S. govt. has
used the threat of trade sanctions to try and get the Chinese govt. to enforce the
intellectual property law.
4. Protecting consumers from “dangerous” products – limit “unsafe” products
5. Furthering the goals of foreign policy - preferential trade terms can be granted to
countries that a government wants to build strong relations with.
6. Protecting the Environment – increasing environmental groups such as Friends of the earth
& Sierra Club have been pressurising govt. to regulate international trade in a way that
protects the environment.
GOVERNMENT INTERVENTION:
Economic Arguments
The infant industry argument - an industry should be protected until it
can develop and be viable and competitive internationally
o accepted as a justification for temporary trade restrictions under
the WTO
Strategic trade policy - in cases where there may be important first
mover advantages, governments can help firms from their countries
attain these advantages
o governments can help firms overcome barriers to entry into
industries where foreign firms have an initial advantage
WORLD TRADE ORGANIZATION
It acts as an umbrella organization that encompasses the GATT along with
two sister bodies, one on services and the other on intellectual property.
The WTO’s General Agreement on Trade in Services (GATS) has taken the
lead to extending the free trade agreement to services.
The WTOs Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS) is an attempt in the way IP rights are protected around the
world and to bring them under common international rules.
WTO has taken responsibility for arbitrating trade disputes and monitoring
the trade policies of member countries
WTO AS A GLOBAL POLICE
Between 1995 to early 2009, more than 370 trade disputes between
member countries have been brought to the WTO
Of these, three fourths had been resolved by informal consultations
between the disputing countries. Resolving the remainder has involved
more formal procedures.
In general, countries have adopted the WTO’s recommendations
The fact that countries are using the WTO’s recommendations
represents an important vote of confidence in the organization’s
dispute resolution procedures.
CURRENT AGENDA OF THE WTO
the rise of anti-dumping policies
reductions in high-tariffs on agricultural goods
the lack of strong protection for intellectual property rights in many nations
continued high tariffs on non-agricultural goods and services in many
nations
Anti-Dumping policies are designed to discourage the importation and sale
of foreign goods at prices well below domestic prices. Imposes Anti-dumping
tariffs.
THE FUTURE OF WTO
The WTO launched a new round of talks at Doha, Qatar in 2001
The agenda includes:
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
WHAT DO TRADE BARRIERS MEAN FOR
MANAGERS
Managers need to consider how trade barriers affect the strategy of the
firm and the implications of government policy on the firm
1. Trade barriers raise the cost of exporting products to a country
2. Voluntary export restraints (VERs) may limit a firm’s ability to serve a
country from locations outside that country
3. To conform to local content requirements, a firm may have to locate
more production activities in a given market than it would otherwise
4. Managers have an incentive to lobby for free trade, and keep
protectionist pressures from causing them to have to change strategies