INTERNATIONAL BUSINESS

Topic: The political economy of International Trade

Instructor: Dr. Chu Thi Kim LoanStudents: Nguyen Thi Hong (543579) Bui Thi Hue (540660) Nguyen Thi Hue (551516)

Discuss the various policy instruments that governments use to restrict imports and promote export

Understand why some government intervene in international trade

To review the political and economic motives that government have intervention

Chapter objectives

I. Introduction

II. Instrument of trade policy

III. The case for government intervention

IV. Implications for business and example

Content

Free trade refers to a situations where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country

Trade policy is a collection of rules and regulation which pertain to trade

Purpose of trade policy: to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners

I. Introduction

II. Instruments of trade policy

Tariffs Subsidies

Import quotas and voluntary export

restraints

Local content requirements

Administrative policies

Antidumping policies

A tariff is a tax levied on importsThere are two basic ways in which tariffs may be levied:1. Specific tariffs:

Are levied as a fixed charge for each unit of a good imported.2. Ad volorem Tariffs:

Are levied as a proportion of the value of the imported goods. A tariff raises the cost f imported products. In most causes,

tariffs are put in place to protect domestic producers from foreign competition.

Ex: When goods are brought into the Netherlands from a country outside the European Union (EU), Customs charges tax on them. The amount of tax depends on the country of origin and the kind of product.

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Gainers:

1. The government gains, because the tariff increases govt. revenues.

2. Domestic producers gain because the tariff affords them some protection against foreign-competitors by increasing the cost of imported foreign goods.

Sufferers:Consumers suffer, because they must pay more for certain

imports

A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants, low-

interest, tax breaks and government equity participation in domestic and government producers in two ways:    1. They help producers compete against foreign imports and 2. Subsidies help them gain export markets.

The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result of them.

Subsidies

An import quotas: Direct restriction on the quantity of some good that may be imported into a country.

An import quotas: Limitations on the quantity of goods that can be imported into the country during a specified period of time.

An import quota is typically set below the free trade level of imports - A binding quota.

If a quota is set at or above the free trade level of imports – A non-binding quota.

Import quotas

Two basic types of quotas:• Absolute quotas limit the quantity of imports to a

specified level during a specified period of time.

• Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate during the specified quota period.

VER: quotas on trade imposed by the exporting country, typically at the request of the importing country’s government.

Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries.

VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.

Ex: one of the most famous examples is the limitation on auto exports to the United States enforced by Japanese automobile producer in 1981.Foreign producers agree to VERs because they fear for more damaging punitive tariffs or import quotas might follow if they do not.

Voluntary export restraints

Benefits:1. Both imports quotas and VERs benefit domestic producers by limiting competition.

Sufferers:

1. Imports quotas and VER always raises the domestic price of an imported goods, so VER do not benefit consumers.

 Local content requirements A local content requirement demands that some

specific fraction of a good be produced domestically- Physical terms ( e.g., 75 percent of component parts

for this product must be produced locally)- Value terms ( e.g., 75 percent of this product must be

produced locally)

Local content requirements (cont.)

Initially used by developing countries to help shift from assembly to production of goods.

Developed countries (US) beginning to implement. For component parts manufacturer, LC Regulations

acts the same as an import quota Benefits producers, not consumers

Administrative policies

Bureaucratic rules designed to make it difficult for imports to enter a country.

- In Japan, custom inspectors insisted on checking every tulip bulb by cutting it vertically down the middle =>Japanese ‘masters’ in imposing rules.

- France required all imported videotape recorders arrive through a small customs entry point => delayed Japanese VCRs

Anti dumping policies Dumpling defined as- Selling goods in a foreign market below production costs- Selling goods in a foreign market below fair market value Dumpling is result of- Unloading excess production in foreign markets- Predatory behavior, with producers using substantial profits

from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market.

+ The predatory firm can raise prices and earn substantial profits.

Anti dumping policies ( cont.)

Antidumping policies are policies designed to punish foreign firms that engage in dumping

The ultimate objective is to protect domestic producers from "unfair" foreign competition

Since these practices are naturally considered to be unfair competition by manufacturers in the country in which the goods are being dumped, the government of the foreign country will be asked to impose "anti-dumping" duties (Countervailing duties)

Countervailing duty

Such duties are similar to anti dumping but are not so severe. These duties are imposed to nullify the benefits offered through cash assistance or subsidies by the foreign country to its manufacturers.

The purpose of the duty is to offset, or "countervail” the subsidy so that the goods cannot be sold at an artificially low price in the foreign country and thereby provide unfair competition for local manufacturers

III. The case for government intervention

Arguments for Government intervention take 2 paths:

Political arguments: protect the interests of certain groups within a nation (normally producers), and often at the expense of other groups (normally consumers)

Economic arguments: boost the overall weath of a nation (to all benefit of all, both producers and consumers)

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Political arguments

Protecting human rights

Protecting jobs and industries: is the most common political argument for government intervention.

It is needed to protect jobs and industries from more efficient foreign producers.

National security: government protect some certain industries because they are important for national security (defense- related industries: aerospace, advanced electronics or semiconductors)

Retaliation: government should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to “play by the rule of the games”.

however, it is a risky strategy.

Protecting consumers: many government have had regulations to protect

consumers from unsafe products ( e.x: limiting or banning the import of certain products)

Furthering Foreign policy objectives: trade policy can be used to support foreign policy objectives.

- Preferential trade terms can be granted to countries that a government wants to build strong relation with.

- Trade policy may be used to punish rogue states that do not abide by international laws or norms.

o Note that other countries can undermine unllateral trade sanctions (e.g US sanctions against Cuba have not stopped other Western countries from trading with Cuba)

Protecting human rights: government can use trade policy to improve the human rights policies of trading partners.

The best way to change the internal human rights of a country is to engage it in international trade (growing bilateral trade raises the income level of both countries, people begin to demand and general

receive better treatment with regard to their human rights)

Economic arguments

The infant industry argument Strategic trade policy

The Infant industry argument said that: a new industry in developing countries should be temporarily supported (with tariffs, import quotas, subsidies) until they have grown strong enough to meet international competition.

However, this argument has been criticized because: - It is useless unless it makes the industry more

efficient - If a country has a potential comparative advntages,

firms should be capable of raising necessary funds without additional support from the government.

Strategic trade policy: is proposed by some new trade theorists.

- Government can help raise national income if it can somehow ensure that the firm to gain first-mover advantage such an industry are domestic rather than foreign enterprises.

- Government can help firms overcome barriers to enter to industries where foreign firms have an initial advantage.

Restrictions on trade may be inappropriate in the cases of:

Retaliation and trade war Domestic politics

Revised case for free trade

Paul Krugman argues that strategic trade policies aimed at establishing domestic in a dominant position in a global industry are begger – the – neighbor policies that boost national income at the expense of other countries

Countries that attempt to use such policies will probably provoke retaliation.

Retaliation and trade war

From Smith to the Great depression Until the great depression of the 1930s, most

countries some degree of protectionismThe Smoot-Hawley tariff was enacted in 1930 in the U.S creating significant import tariffs on foreign goodsOther nations took similar steps and as the depression deepened, world trade fell further

Development of the world trading system

After WWII, the U.S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT) The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade

1947-79: GATT, Trade Liberalization, And Economic Growth

In the 1980s and early 1990s, the world trading system was strainedJapan’s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countriesMany countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT

1980-1993: Protectionist Trends

The Uruguay Round of GATT negotiations began in 1986

The talks focused on several areas:Services and Intellectual PropertyGoing beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture The World Trade OrganizationIt was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules

The WTO encompassed GATT along with two sisters organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

The Uruguay Round And The World Trade Organization

Since its establishment, the WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services So far, the WTO’s policing and enforcement mechanisms are having a positive effectMost countries have adopted WTO recommendations for trade disputes

WTO: Experience To Date

The 1999 meeting of the WTO in Seattle was important not only for what happened between the member countries, but also for what occurred outside the buildingInside, members failed to agree on how to work toward the reduction of barriers to cross-border trade in agricultural products and cross-border trade and investment in servicesOutside, the WTO became a magnet for various groups protesting free trade

WTO: Experience To Date

The current agenda of the WTO focuses on: the rise of anti-dumping policiesthe high level of protectionism in agriculturethe lack of strong protection for intellectual property rights in many nationscontinued high tariffs on nonagricultural goods and services in many nations

The Future Of The WTO: Unresolved Issues And The Doha Round

Managers need to consider how trade barriers affect the strategy of the firm and the implication of government policy on the firm

Trade barriers raise the cost of exporting products to a country

Voluntary export restraints may limit a firm’s ability to serve a country from location outside that country

All of these can raise the firm’s costs above the level that could be achieved in a world without trade barriers

IV. Implication for Business and example

International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies

While there may be short run benefits to having governmental protection in some situations, in the long run these can backfire and other governments can rataliate

Policy implications

Example: Vietnam exports to face more trade barriers

Local exporters will have to cope with more non-tax trade barriers while other countries try to limit imports and protect production as the global economic recession continues.

Vietnam will face increased competition from other exporters who have cheaper labor costs and higher productivity

Vietnam export seafood The demand for seafood in major markets like the EU, the US

and Japan has recently increased => trade barriers from importers

Vietnam export seafood (cont.) Vietnam’s tra fish exporters have been accused of failing to

meet food hygiene and safety standards, polluting the environment, and selling their products too cheaply

It is facing the risk of an anti-dumping duty tax of 35 percent in Brazil. Brazil has applied stricter import procedures to limit imports of the fish from Vietnam.

Other markets are strengthening monitoring antibiotic residues in imported seafood. Japan began to check 100 percent of shrimp imported from Vietnam on June 9, 2012.

Vietnam should strictly control the use of antibiotics in seafood production and processing.

Other exports Seafood is not the sole item threatened by trade barriers

US may consider applying anti-dumping duties on Vietnamese wood interiors used for bedrooms.

Vietnam now is the second largest exporter of such items to the US, after China

Barriers have been thrown up against Vietnam’s footwear exports too.

According to the Trade Remedies Council, Vietnam faced 36 anti-dumping lawsuits, mainly relating to footwear, seafood, and industrial products (1994-2010)