International Business
11e
By Charles W.L. Hill
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Chapter 7
Government Policy
and International
Trade
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What Is The Political Reality
Of International Trade?
Free trade occurs when governments do
not attempt to restrict what citizens can
buy from another country or what they can
sell to another country
many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups
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How Do Governments
Intervene In Markets?
Governments use various methods to
intervene in markets including
1. Tariffs - taxes levied on imports that
effectively raise the cost of imported
products relative to domestic products
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
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How Do Governments
Intervene In Markets?
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
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How Do Governments
Intervene In Markets?
2. Subsidies - government payments to
domestic producers
Subsidies help domestic producers
compete against low-cost foreign
imports
gain export markets
Consumers typically absorb the costs of
subsidies
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How Do Governments
Intervene In Markets?
3. 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
A quota rent - the extra profit that producers
make when supply is artificially limited by an
import quota
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How Do Governments
Intervene In Markets?
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting
country, typically at the request of the
importing country’s government
Import quotas and voluntary export
restraints
benefit domestic producers
raise the prices of imported
goods
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How Do Governments
Intervene In Markets?
5. Local Content Requirements - demand
that some specific fraction of a good
be produced domestically
benefit domestic producers
consumers face higher prices
6. Administrative Policies - bureaucratic
rules designed to make it difficult for
imports to enter a country
polices hurt consumers by limiting
choice
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How Do Governments
Intervene In
7. Markets?
Antidumping Policies–also
countervailing
called
duties–punish foreign firms that
engage in dumping and protect domestic
producers from “unfair” foreign competition
dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
enables firms to unload excess production in
foreign markets
may be predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors
out of that market, and then later raise prices
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Why Do Governments
Intervene In
Markets?
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
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What Are The Political Arguments
For Government Intervention?
1. Protecting jobs - the most common
political reason for trade restrictions
results from political pressures by unions or
industries that are "threatened" by more
efficient foreign producers and have more
political clout than consumers
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What Are The Political Arguments
For Government Intervention?
2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security
aerospace or semiconductors
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What Are The Political Arguments
For Government Intervention?
3. Retaliation for unfair foreign competition -
when governments take, or threaten to
take, specific actions, other countries
may remove trade barriers
if threatened governments do not back
down, tensions can escalate and new trade
barriers may be enacted
risky strategy
4. Protecting consumers from “dangerous”
products - limit “unsafe” products
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What Are The Political Arguments
For Government Intervention?
5. Furthering the goals of foreign policy -
preferential trade terms can be granted
to countries that a government wants to
build strong relations with
trade policy can also be used to punish
rogue states
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What Are The Political Arguments
For Government Intervention?
6. Protecting the human rights of individuals in
exporting countries - through trade policy
actions
7. Protecting the environment - international trade
is associated with a decline in environmental
quality
concern over global warming
enforcement of environmental regulations
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What Are The Economic
Arguments For Government
Intervention?
1. The infant industry argument - an
industry should be protected until it can
develop and be viable and competitive
internationally
accepted as a justification for temporary
trade restrictions under the WTO
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What Are The Economic
Arguments For Government
Intervention?
2. Strategic trade policy – first-mover
advantages can be important to success
governments can help firms from their
countries attain these advantages
governments can help firms overcome
barriers to entry into industries where foreign
firms have an initial advantage
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What Is The Future Of The
World Trade Organization?
The current agenda of the WTO focuses
on
the rise of anti-dumping policies
the high level of protectionism in agriculture
the lack of strong protection for intellectual
property rights in many nations
continued high tariffs on nonagricultural goods
and services in many nations
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What Is The Future Of The
World Trade Organization?
The WTO launched a new round of talks
at Doha, Qatar in 2001 that have
already gone on for 12 years and are
currently stalled.
The agenda includes
cutting tariffs on industrial goods and
services
phasing out subsidies to agricultural
producers
reducing barriers to cross-border
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