Chapter 7

Government Policy
and International Trade
 First – A Word About Trade Relationships

Long-term relationships = 3 or more years

Importance varies by country
Value (% long-term US imports)

Taiwan – 67%, Mexico – 65% Japan – 62%

Netherlands – 29%, Spain & China – 33%
Count of Shipments (% long term US imports)

Taiwan – 24%, Thailand 22%, Chile 21%

China – 11%, Spain & Korea – 13%
See Chart

Source: (for Top 20 US trading partners)

Learning and the Value of Relationships in International Trade
Federal Reserve Board - CES 16-11 February, 2016
 Introduction

Free trade occurs when governments do not
attempt to restrict what its citizens can buy from
another country or what they can sell to another
country

While many nations are nominally committed to
free trade, they tend to intervene in international
trade to protect the interests of politically important
groups
How Do Governments Intervene In Markets?

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 ($/ kilo)

Ad valorem tariffs - levied as a proportion of

the value of the imported good (%)
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
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
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

e.g.,
Japanese auto exports to U.S.
U.S. put pressure on Japan to reduce export
volume of autos to the U.S. 1981
 How Do Governments Intervene In Markets?

5. Local Content Requirements - demand that

some specific fraction of a good be
produced domestically (NAFTA)

benefit domestic producers

consumers face higher prices
6. Administrative Policies (informal barriers)
bureaucratic rules designed to make it
difficult for imports to enter a country

polices hurt consumers by limiting choice

E.g., Customs procedures hamper imports
How Do Governments Intervene In Markets?
7. Antidumping Policies – aka countervailing
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
Why Do Governments Intervene In Markets?
Political Economic

Jobs The most common political

reason for trade restrictions
National Security
Retaliation Protecting the interests of
certain groups within a nation
Consumers
(normally producers), often at
Foreign Policy the expense of other groups
Human Rights (normally consumers)
Environment
Why Do Governments Intervene In Markets?
Political Economic

Jobs Industries are often protected

because they are deemed
National Security important for national security
Retaliation
aerospace or
Consumers
semiconductors
Foreign Policy
Human Rights
Environment
Why Do Governments Intervene In Markets?
Political Economic

Jobs When governments take, or

threaten to take, specific
National Security actions, other countries may
Retaliation increase trade barriers
Consumers
e.g., U.S. & E.U. over beef
Foreign Policy with growth hormones
Human Rights
Environment
Why Do Governments Intervene In Markets?
Political Economic

Protect consumers from

Jobs “unsafe” products
National Security
e.g., FDA limit papayas from
Retaliation Mexico due to possible
Consumers Salmonella
Foreign Policy
Human Rights
Environment
Why Do Governments Intervene In Markets?
Political Economic

Preferential trade terms may

Jobs be granted to countries that
National Security a government wants to build
strong relations with.
Retaliation
Consumers Also used to punish rogue
states
Foreign Policy e.g., North Korea, Cuba
Human Rights
Environment
Why Do Governments Intervene In Markets?
Political Economic

Jobs Protect and promote human

rights through trade policy
National Security actions
Retaliation
e.g., Grant China MFN status
Consumers
in 1999
Foreign Policy
Human Rights
Environment
Why Do Governments Intervene In Markets?
Political Economic

Jobs Protect environment because

international trade is
National Security associated with a decline in
Retaliation environmental quality
Consumers
Concern over global warming
Foreign Policy
Human Rights Enforcement of environmental
regulations (ISO 14,000)
Environment
Why Do Governments Intervene In Markets?
Political Economic

Infant Industry An industry should be

protected until it can develop
Strategic Trade and be viable and competitive
internationally

Accepted as a justification for

temporary trade restrictions
under the WTO

e.g., Brazilian auto makers

Why Do Governments Intervene In Markets?
Political Economic

Infant Industry Governments can help firms

from their countries attain first
Strategic Trade mover advantages

Governments can help firms

overcome barriers to entry
into industries where foreign
firms have initial advantage

e.g., France: merge smaller

firms into large firms
 China & Germany
How China and Germany intervene …

FILM (7 min)

Consider while watching:

How does China intervene?
How does Germany intervene?
Pros and Cons of approaches?
 History of World Trading System

Until the Great Depression of the 1930s,

most countries had some degree of
protectionism

Smoot-Hawley tariff (1930)

After WWII, the U.S. and other nations
realized the value of freer trade

established the General Agreement on Tariffs
and Trade (GATT) - a multilateral agreement
to liberalize trade
 History of World Trading System

In the 1980s and early 1990s

protectionist trends emerged

Japan’s perceived protectionist (neo-
mercantilist) policies created intense political
pressures in other countries

persistent trade deficits by the U.S

use of non-tariff barriers increased
 History of World Trading System

The Uruguay Round of GATT

negotiations began in 1986 focusing on
1. Services and intellectual property

going beyond manufactured goods to address
trade issues related to services and intellectual
property, and agriculture
2. The World Trade Organization formed

it was hoped that enforcement mechanisms
would make the WTO a more effective policeman
of the global trade rules
 History of World Trading System

The WTO encompassed GATT along with
two sisters organizations

the General Agreement on Trade in Services
(GATS)

working to extend free trade agreements to
services

the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)

working to develop common international
rules for intellectual property rights
 How About Now?
The WTO is effective, overall …

153 members in 2011

so far, the WTO’s policing and enforcement
mechanisms are having a positive effect

most countries adopted WTO
recommendations for trade disputes

75% of disputes are settled by informal
consultation
Not effective regarding currency manipulation …

China largest currency manipulator

Switzerland, Denmark, Hong Kong, Israel,
and Japan
 Future WTO Direction?
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
 Tariffs in U.S.?
Go to: LINK
http://dataweb.usitc.gov/scripts/tariff_current.asp

1. Identify two products you wish to import

A. One must be “Footwear”
B. Second is your choice
2. Select radio and click on “Detail”
3. Identify:
A. Description
B. Value of U.S. imports
C. Ad valorem duty
D. Specific duty
E. MFN rate
F. Preferential programs
Go to: http://instruction2.mtsac.edu/rjagodka
Click “International Business Resources” -> “Country Data” (first link on page)
ConsultaPedia.com – (1) Click on your assigned country

Mobile Friendly

(2) Click on tabs

for details about
your country