Intruments of Trade Policy 1220700221842594 9

7/27/2019 Intruments of Trade Policy 1220700221842594 9

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Case: Agricultural subsidies and

development

Rich nations spend more than $300 billion a

year to subsidize their farmers

Subsidies create surplus production Surplus production leads to dumping and

depressed prices

UN estimates producers in developing nationslose $50 billion export revenue because of

depressed prices


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Agricultural subsidies and development

Rich countries of the developed world

subsidize farm products

Reasons To keep commodity prices low

To favor politically active farmers

Consequences

Surplus production

Depressed world prices (a result of surplus)


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Instruments of trade policy

Tariffs - oldest form of trade policy

Specific

Ad valorem

Good for government Protects domestic producers

Reduces efficiency

Bad for consumers

Increases cost of goods


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Instruments of trade policy-subsidies

Government payment to a domestic producer

Cash grants

Low-interest loans

Tax breaks

Government equity participation in the company

Subsidy revenues are generated from taxes

Subsidies encourage over-production,

inefficiency and reduced trade


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Instruments of trade policy - Quota

Import quota

Restriction on the quantity of some goodimported into a country

Voluntary export restraint (VER)

Quota on trade imposed by exporting country,

typically at the request of the importing country


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Instruments of trade policy -Quota

Benefits producers by limiting import

competition

Japanlimited exports to 1.85 mm vehicles/year

Cost to consumers - $1B/year between 81 - 85.

Money went to Japanese producers in the form

of higher prices

Encourages strategic action by firms in order tocircumvent quota


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Instruments of trade policy- local content

Requires some specific fraction of a good to beproduced domestically

Percent of component parts

Percent of the value of the good 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 Regulationsacts the same as an import quota

Benefits producers, not consumers


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Instruments of trade policy-administrative

policies

Bureaucratic rules designed to make it

difficult for imports to enter a country.

Japanese masters in imposing rules.


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Instruments of trade policy-anti dumping

policies Defined as

Selling goods in a foreign market belowproduction costs

Selling goods in a foreign market below fairmarket value

Result of

Unloading excess production.

Predatory behavior

Remedy: seek imposition of tariffs


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Political arguments for intervention

Protecting consumers

Genetically engineered seeds and crops

Hormone treated beef

Protecting human rights

MFN

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Economic arguments for intervention

Infant industry.

Oldest argument - Alexander Hamilton, 1792

Protected under the WTO

Only good if it makes the industry efficient.

Brazil auto-makers - 10th largest - wilted when

protection eliminated

Requires government financial assistance. Today if the industry is a good investment, global

capital markets would invest

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Economic arguments for intervention

Strategic trade policy

Government should use subsidies to protect

promising firms in newly emerging industries

with substantial scale economies

Governments benefit if they support domestic

firms to overcome barriers to entry created byexisting foreign firms

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Development of the world trading system

GATT -multilateral agreement established

under US leadership1948

Objective is to liberalize trade by eliminating

tariffs, subsidies, & import quotas

19 original members grew to 120

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Development of the world trading system

Used Rounds of talks to gradually reduce

trade barriers

Uruguay Round GATT 1986-93 Mutual tariff reductions negotiated

Dispute resolution only if complaints were

received

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Disturbing trends in the world trading

system

Pressure for greater protectionism due to

Increase in the power of Japans economic

machine and closed Japanese markets US trade deficit

GATT circumvented by many countries

Through use of VER

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GATT criticisms

Economic theories dont fit the real world

model

US global preeminence has declined Shift from cutting tariffs to eliminating non-

tariff barriers angered countries

National Treatment or Most FavoredNation status results in inequalities

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The World Trade Organization

The WTO was created during the Uruguay Roundof GATT to police and enforce GATT rules

Most comprehensive trade agreement in history

Formation of WTO had an impact on

Agriculture subsidies (stumbling block: US/EU)

Applied GATT rules to services and intellectualproperty (TRIPS)

Strengthened GATT monitoring andenforcement

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The WTO

145 members in 2003

Represents 90% of world trade

9 of 10 disputes satisfactorily settled Tariff reduction from 40% to 5%

Trade volume of manufactured goods has

increased 20 times

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The WTO

Policing organization for:

GATT

Services

Intellectual property

Responsibility for trade arbitration:

Reports adopted unless specifically rejected

After appeal, failure to comply can result incompensation to injured country or tradesanctions

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WTO at work

280 disputes brought to WTO between 1995

and 2003

196 handled by GATT during its 50 year

history

US is biggest WTO user

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The WTO -achievements

Telecommunications (1997)

68 countries (90%) of world telecommunications

revenues Pledged to open their market to fair competition

Financial Services (1997)

95% of financial services market 102 countries will open, their markets to varying

degrees

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WTO in Seattle

Millennium round was aimed at furtherreduction of trade barriers in agriculture andservices

WTO meeting disrupted by Human rights groups

Trade unions

Environmentalists Anti globalization groups

No agreement was reached

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Doha agenda -WTO

Cutting tariffs on industrial goods andservices

Phasing out subsidies

Reducing antidumping laws

WTO regulation on intellectual property

should not prevent members from protectingpublic health

TRIPS agreement

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Antidumping cases by WTO members

Fig 5.1

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Antidumping actions

Four sectors account for 70 percent of all

antidumping actions reported to WTO

Metal industries

Chemicals

Plastics

Machinery and electrical equipment

Actions often initiated by politicians in thevarious countries to please strong lobbying

groups in exchange for votes

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Protectionism in agriculture

Recent focus of WTO on agricultural subsides These are 3 to 5 times higher than non-

agricultural subsidies

Advanced nations are the strongest defenders ofthis system

Combination of high tariffs and subsides onagricultural product

Raises price to the consumer Reduces volume of agricultural trade

Encourages overproduction of subsidizedproducts

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Protection of intellectual property

Trade related Aspects of Intellectual property

(TRIPS)

WTO members allowed to grant and enforce

patents and copyrights

This encourages innovation

Reduces piracy rates in drugs, software music

Expected to boost global economic rates andsocial and economic welfare around the world

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Managerial implications

Trade barriers act as a constraint on firm

strategy

May be useful to establish more production

activities in the protected country

Business gains from governments efforts to

open protected markets are more than gains

from governments efforts to protect domestic

industries/firms

Intruments of Trade Policy 1220700221842594 9

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