Irwin/McGraw-Hill Copyright 2001 The McGraw-Hill Companies, Inc. All rights reserved.
FiveC h a p t e r
The Political Economy of International Trade
Global T
rade and Investment E
nvironment
Irwin/McGraw-Hill Copyright 2001 The McGraw-Hill Companies, Inc. All rights reserved.
Governments and TradeFree trade: a government does not restrict what its
citizens can buy from or sell to another country
Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy
Higher level domestic consumption; more efficient use of resources
Stimulation of domestic growth and wealth creation
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Governments and Trade
More often governments manage trade (… level the “playing-field”) Restriction of imports: protectionist intervention Promotion of exports Trade promotion and FDI incentives
Free-trade “Good” or “Bad”? Social issues related to free-trade Implications for business and individual groups
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Instruments of Trade Policy
TariffsSubsidiesImport quotasVoluntary export restraintsLocal content requirementsAnti-dumping policiesAdministrative policies
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Taxes levied on imports (also sometimes on exports) Specific tariff: fixed charge for each good imported Ad valorem tariff: a % of imported goods value
Who gains: Government Domestic producers (at least in the short run) Employees of protected industries keep their jobs
Who loses: Consumers who pay higher prices The economy which remains inefficient Employees of protected industries who don’t develop new
skills
TariffsSlide 5-4
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SubsidiesGovernment payments to domestic producers
Cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders
Subsidies are aimed at lower costs to help Compete against cheaper imports Gain export markets Increase domestic employment Local producers achieve first-mover advantage in emerging
industriesGovernments tax individuals… to pay for subsidiesConsumers buy more expensive goods with lower
disposable incomes
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Import Quotas and Voluntary Export Restraints Import quota: government specifies how much of what
product can be imported from which countries Voluntary export restraint: a quota imposed by the
exporting country officially or unofficiallyLocal Content Requirements
Some % of a good has to be produced domestically with local raw materials and local labor
Used by LDCs to Achieve technology transfer, skills transfer Shift manufacturing base to a higher technological level
Similar effects to those of import quotas
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Anti-dumping Policies Dumping: selling goods in an overseas market
At below their production costs or Below “fair market value”
Anti-dumping policies punish producers who dump and protect domestic producers
Administrative policies Bureaucratic rules that make it difficult for
imports to enter a country
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Political Arguments for InterventionNational securityIndividual industries and jobs
protectedRetaliationConsumer protection (health, safety)Furthering foreign policy objectives
Economic Arguments for Intervention
Infant industry protectionStrategic trade policy
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International Trade Cooperation (!)
U.S.A. and: foreign companies trading with Cuba any company dealing with Iran-Iraq
W.T.O. in place but... disputes with China dealt on bilateral basis (not a
member) disputes with Japan dealt on bilateral basis (a
member) trade blocks proliferating (EU, NAFTA, ASEAN)
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The Global Trading SystemSmith to Great Depression
Britain adopts free trade in 1846 Smoot-Hawley act (US) 1930 aimed at employment
protection (caused by the Great Depression)1947-1979: GATT, Trade Liberalization,
Economic Growth1980-1993: GATT needs fixing
Uruguay round of GATT negotiations (1986-1993) Creation of WTO with powers to implement trade
agreements
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GATTPre-WWII protectionism
Smoot-Hawley +57% import tariffs (1930) UK, France, Italy followed suit world depression in ‘30s
Havana Conference (1947) -> GATT 125 countries by 1994 small staff in Geneva tariffs fm 40% in ‘47 to 3% in ‘95 trade 15x to $6.75 trillion in ‘92
WTO superceded GATT in 1995
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Uruguay Round of GATT negotiationsTariffs cut furtherAgricultural Policy Modified:
cut price supports 20%, export subsidies 36% For this policy: USA, Argentina, Australia, Canada Anti: Japan, Korea, India, EU
Services given prominence: developed set of principlesIntellectual Property Rights protected further:
patents, copyrights, trademarks, brand namesWTO created: to implement Uruguay round,
controversial
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WTO: Early ExperienceWTO as a global policeman
Up to 1995-1999: 160 ± cases brought for decision 30 ± withdrawn after direct discussions between countries in
dispute 100 + undergoing direct discussion 20 ± in final stage of solution implementation 4 have been settled 7 closed with no need for action
GATT dealt with 196 cases from 1947-1995!
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The WTO
145 members in 2003Represents 90% of world trade9 of 10 disputes satisfactorily settledTariff reduction from 40% to 5%Trade volume of manufactured goods has increased
20 times
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“So what” for Business”
Trade barriers affect firm strategy
Government policy has direct impact on firm business
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