IBM Module 4

8/3/2019 IBM Module 4

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The World We Live in..The World We Live in..

Progressively becoming more and moreintegrated and interdependent

Driven by Technology- ICT andtransportationDeclining trade barriersChanging equations of global dominance

Open, yet, occasional emergence ofprotectionism?How free is free trade?

MSM/IBM/2011MSM/IBM/2011


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Instruments of Trade PolicyInstruments of Trade Policy

TariffsTariffs

SubsidiesSubsidies

Import QuotasImport Quotas

Voluntary Export RestraintsVoluntary Export Restraints

Anti dumping dutiesAnti dumping duties

Administrative policiesAdministrative policies



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Instruments of Trade PolicyInstruments of Trade Policy

TariffsTariffs

SubsidiesSubsidies

Import QuotasImport Quotas

Voluntary Export RestraintsVoluntary Export Restraints

Anti dumping dutiesAnti dumping duties

Administrative policiesAdministrative policies



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Instruments of Trade Policy:Instruments of Trade Policy:

TariffsTariffs Tariffs are the oldest forms of trade policy; they fallTariffs are the oldest forms of trade policy; they fallinto two categoriesinto two categories

Specific tariffsSpecific tariffs are levied as a fixed charge forare levied as a fixed charge foreach uniteach unit

Ad valoremAd valorem tariffs are levied as a proportion oftariffs are levied as a proportion ofthe value of the imported goodthe value of the imported good

Tariffs are good for government because theyTariffs are good for government because theygenerate revenuegenerate revenue

Tariffs protect domestic producers but they reduceTariffs protect domestic producers but they reduce

efficiencyefficiency Tariffs are bad for consumers because they increaseTariffs are bad for consumers because they increase

the cost of goodsthe cost of goods



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SubsidiesSubsidies Government payment to a domestic producerGovernment payment to a domestic producer

Cash grantsCash grants

LowLow--interest loansinterest loans

Tax breaksTax breaks

Government equity participation in theGovernment equity participation in the

companycompany

Subsidy revenues are generated from taxesSubsidy revenues are generated from taxes Subsidies encourage overSubsidies encourage over--production,production,

inefficiency and reduced tradeinefficiency and reduced trade



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Agricultural subsidies and developmentAgricultural subsidies and development

Rich countries of the developed worldRich countries of the developed worldsubsidize farm productssubsidize farm products

ReasonsReasonsTo keep commodity prices lowTo keep commodity prices low

To favour politically active farmersTo favour politically active farmers

ConsequencesConsequences

Surplus productionSurplus production

Depressed world prices (a result of surplus)Depressed world prices (a result of surplus)



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EU SubsidiesEU Subsidies

Diary farmers $ 15 billion a year ($2 a dayDiary farmers $ 15 billion a year ($2 a dayfor every cowfor every cow--more than the daily incomemore than the daily incomeof half the worlds population!)of half the worlds population!)

Sugar beet producers get more than $Sugar beet producers get more than $4000 an acre.4000 an acre.



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Agricultural subsidies: global trendsAgricultural subsidies: global trends

JapanJapan--62% of the value of gross farm62% of the value of gross farmreceipts ($ 21000 per farmer)receipts ($ 21000 per farmer)

EUEU--43% of the value of gross farm43% of the value of gross farmreceipts ($ 19000 per farmer)receipts ($ 19000 per farmer)

USAUSA--22% of the value of gross farm22% of the value of gross farmreceipts ($ 19000 per farmer)receipts ($ 19000 per farmer)

CanadaCanada--18% of the value of gross farm18% of the value of gross farmreceipts ($ 8000 per farmer)receipts ($ 8000 per farmer)



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Protectionism in agricultureProtectionism in agriculture

Recent focus of WTO on agriculturalRecent focus of WTO on agriculturalsubsidessubsides These are 3 to 5 times higher than nonThese are 3 to 5 times higher than non--

agricultural subsidiesagricultural subsidies

Advanced nations are the strongestAdvanced nations are the strongestdefenders of this systemdefenders of this system

Combination of high tariffs and subsidiesCombination of high tariffs and subsidieson agricultural producton agricultural product

Raises price to the consumerRaises price to the consumer Reduces volume of agricultural tradeReduces volume of agricultural trade Encourages overproduction of subsidizedEncourages overproduction of subsidized

productsproductsMSM/IBM/2011MSM/IBM/2011


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QuotasQuotas Import quotaImport quota

Restriction on the quantity of some goodRestriction on the quantity of some good

imported into a countryimported into a countryVoluntary export restraint (VER)Voluntary export restraint (VER)

Quota on trade imposed by exportingQuota on trade imposed by exporting

country, typically at the request of thecountry, typically at the request of the

importing countryimporting country



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Results of Japanese VERsResults of Japanese VERs

Benefits producers by limiting importBenefits producers by limiting importcompetitioncompetition

JapanJapan -- limited to 1.85 Million vehicles/yearlimited to 1.85 Million vehicles/year Cost to consumersCost to consumers -- $1B/year between 81$1B/year between 81 --

85.85.

Money went to Japanese producersMoney went to Japanese producers

in the form of higher prices.in the form of higher prices.



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Instruments of Trade Policy:Instruments of Trade Policy:Local Content RequirementLocal Content Requirement

Requires some specific fraction of a good to beRequires some specific fraction of a good to beproduced domesticallyproduced domestically Percent of component partsPercent of component parts

Percent of the value of the goodPercent of the value of the good

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

Developed countries (US) beginning toDeveloped countries (US) beginning toimplementimplement

For component parts manufacturer, LCR acts theFor component parts manufacturer, LCR acts thesame as an import quotasame as an import quota

Benefits producers, not consumersBenefits producers, not consumers



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Instruments of Trade Policy:Instruments of Trade Policy:Administrative PoliciesAdministrative Policies

Bureaucratic rules designed to makeBureaucratic rules designed to makeit difficult for imports to enter ait difficult for imports to enter a

countrycountryFranceFrance video tapesvideo tapes

Japanese masters in imposing rulesJapanese masters in imposing rulesTulip bulbsTulip bulbs

Federal ExpressFederal Express



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Instruments of Trade Policy:Instruments of Trade Policy:Antidumping PoliciesAntidumping Policies

Defined asDefined as

Selling goods in a foreign market belowSelling goods in a foreign market below

production costsproduction costs

Selling goods in a foreign market below fairSelling goods in a foreign market below fairmarket valuemarket value

Result ofResult of

Unloading excess productionUnloading excess production Predatory behaviorPredatory behavior

Remedy: seek imposition of tariffsRemedy: seek imposition of tariffs



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Political Arguments forPolitical Arguments forInterventionIntervention

Protecting jobs and industriesProtecting jobs and industries

CAP (Europe) and VERCAP (Europe) and VER

National securityNational securityDefense industriesDefense industries -- semiconductorssemiconductors

RetaliationRetaliationPunitive sanctionsPunitive sanctions



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Political Arguments for InterventionPolitical Arguments for Intervention

Protecting consumersProtecting consumers Genetically engineered seeds and cropsGenetically engineered seeds and crops

Hormone treated beefHormone treated beef

Furthering foreign policy objectivesFurthering foreign policy objectives HelmsHelms--Burton ActBurton Act

DAmato ActDAmato Act

Protecting human rightsProtecting human rightsMFNMFN



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Economic Arguments forEconomic Arguments forInterventionIntervention

Infant industryInfant industryOldest argumentOldest argument -- Alexander Hamilton, 1792Alexander Hamilton, 1792

Protected under the WTOProtected under the WTO

Only good if it makes the industry efficientOnly good if it makes the industry efficient

Brazil autoBrazil auto--makersmakers -- 10th largest10th largest -- wiltedwilted

when protection eliminatedwhen protection eliminated

Requires government financial assistanceRequires government financial assistance

Today if the industry is a good investment,Today if the industry is a good investment,

global capital markets would investglobal capital markets would invest



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Economic Arguments forEconomic Arguments for

InterventionInterventionStrategic trade policyStrategic trade policy

Government should use subsidies to protectGovernment should use subsidies to protect

promising firms in newly emerging industriespromising firms in newly emerging industrieswith substantial scale economieswith substantial scale economies

Governments benefit if they supportGovernments benefit if they support

domestic firms to overcome barriers to entrydomestic firms to overcome barriers to entry

created by existing foreign firmscreated by existing foreign firms


IBM Module 4

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