TARIFFS

 The oldest and simplest instrument of trade policy.

 Tax levied on imports (or exports).

Two Categories

1. SPECIFIC TARIFFS- levied as a fixed charge for each unit of a good imported.

2. AD VALOREM TARIFFS- levied as a proportion of the value of the imported good.

 Placed on imports to protect domestic producers from foreign competition by raising the price of imported
goods.
 Also produced revenue for the government

In import tariffs, government and domestic producers are those who gains, and consumers are those who suffers.

EXPORT TARIFFS

• Levied on exports of a product from a country

• Far less common than Import Tariffs

TWO OBJECTIVES

1. RAISE revenue for the GOVERNMENT

2. REDUCE exports from a sector

SUBSIDIES - a government payment to a domestic producer

FORMS: Cash Grants, Low- interest loans, Tax breaks

• Government equity participation in domestic firms

• By lowering production cost, subsidies help domestic producers in:

• Competing against foreign imports

• Gaining export markets

AGRICULTURE tends to be one of the largest beneficiaries of subsidies in most countries

IMPORT QUOTA

 Direct restriction on the quantity of some good that may be imported into a country.

TARIFF RATE QUOTA

• a mechanism that allows a set amount of specific products to be imported at a low or zero rate of duty

• Common hybrid of a quota and a tariff

• Lower tariff rate is applied to imports within the quota than those over the quota.
VOLUNTARY EXPORT RESTRAINTS

Variant on import quota

• Quota on trade imposed by the exporting country, typically at the request of the importing country’s government.
• Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing protectionist pressures in a
country.

QUOTA RENT

• Extra profit that producers make when supply is artificially limited by an import quota.

LOCAL CONTENT REQUIREMENT (LCR)

• A requirement that some specific fraction of a good be produced domestically.

• It can be expressed either in PHYSICAL TERMS or in VALUE

TERMS

• Have been widely used by developing countries and have been used also by developed countries

• It provided protection for a domestic producer of parts in the same way an import quota does: by limiting foreign
competition

• As with all trade policies, LCR tend to benefit producers and not consumers.

ADMINISTRATIVE POLICIES

• Used by the government to restrict imports and boost exports.

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

• Administrative instruments benefit produces and hurt consumers.

DUMPING

• Variously defined as selling goods in a foreign market at below their costs of production or selling goods in a
foreign market at below their fair market value.

• Viewed as a method by which firms unload excess production in foreign markets.

• Designed to punish foreign firms that engage in dumping.

OBJECTIVE: To PROTECT domestic producers from UNFAIR foreign competition.

 The Case for Government Intervention

Political arguments

• are concerned with protecting the interests of certain groups within a nation (normally producers), often at the
expense of other groups (normally consumers).

Economic arguments

• are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and
consumers)

Political arguments for government intervention include:

1. Protecting Jobs and Industries

• The most common political reason for trade restrictions is protecting jobs and industries

• Usually, this results from political pressures by unions or industries that are "threatened" by more efficient foreign
producers and have more political clout than the consumers that will eventually pay the costs.

2. National Security

• Protecting industries such as aerospace or electronics because they are important for national security is another
argument for trade restrictions.

• Industries such as aerospace or electronics are often protected because they are deemed important for national
security. In 1986, the US semiconductor manufacturing consortium of 14 companies, SEMATECH, convinced the
government that their product was vital to defense industries and so the US could not rely on foreign supplies for these.
As a result, the government provided $100 million per year as subsidies. It was withdrawn in 1996 only after the rise in
demand for personal computers and Intel processors.

3. Protecting Consumers

• Consumer protection can also be an argument for restricting imports.

4. 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 relations with

• Trade policy can also been used to punish rogue states that do not abide by international laws or norms (the U.S. has
done this with Libya, Iran, Iraq, North Korea, and Cuba)

• However, it might cause other countries to undermine unilateral trade sanctions.

5. Protecting Human Rights

• Governments sometimes use trade policy to improve the human rights policies of trading partners

• Unless many countries choose to take such action, however, it is unlikely to prove successful.

• Some critics have argued that the best way to change the internal human rights of a country is to engage it in

international trade.

• The decision to grant China MFN status in 1999 was based on this philosophy.
Economic Arguments for Intervention

The Infant Industry Argument

• The infant industry argument suggests that an industry should be protected until it can develop and be viable and
competitive internationally.

• The infant industry argument has been accepted as a justification for temporary trade restrictions under the WTO

• However, it can be difficult to gauge when an industry has grown up.

• Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of
raising necessary funds without additional support from the government.

Strategic Trade Policy

• Strategic trade policy suggests that in cases where there may be important first mover advantages, governments can
help firms from their countries attain these advantages.

• Strategic trade policy also suggests that governments can help firms overcome barriers to entry into industries where
foreign firms have an initial advantage

• Country Focus: Trade in Hormone-Treated Beef Summary

This feature describes the trade battle between the U.S. and EU over beef from cattle that have been given growth
hormones. It outlines the basic issues that led to the dispute and shows how the World Trade Organization has treated
the case.

THE REVISE CASE FOR FREE TRADE

• New trade theorists believe government intervention in international trade is justified.

• Some new trade theorists believe that although strategic trade policy is appealing in theory, in practice it may not be
workable.

Two situations where restrictions on trade may be inappropriate

1. Retaliation and Trade War

2. Domestic Policies

RETALIATION AND TRADE WAR

• Strategic trade policies aimed to established domestic firms in a dominant position in global industry are “beggar-thy-
neighbor policies’ that boost national income at the expense of other country.

• It is the protection of the domestic economy by reducing imports and increasing exports.

• A country that attempts to use such policies will probably provoke retaliation.

• A trade war could leave both countries worse off

DOMESTIC POLICIES

• Governments can be influenced by special interest

• A government’s decision to intervene in a market may appease a certain group, but not necessarily the support the
interests of the country a whole.

Development of the World Trading System

• Since World War II, an international trading framework has evolved to govern world trade.

• In its first fifty years, the framework was known as the General Agreement on Tariffs and Trade (GATT).

• Since 1995, the framework has been known as the World Trade Organization (WTO).

From Smith to Great Depression

• Up until the Great Depression of the 1930s, most countries had some degree of protectionism.

• In the 1930, the U.S enacted the Smooth-Hawley Act, which created significant import tariffs on foreign goods.

• Other nations took similar steps and as the depression deepened, world trade fell further.

1947-1979:

GAAT, Trade liberalization, and Economic Growth

• After WWII, the U.S. and other nations realized the value of free trade, and established the General Agreement on
Tariffs and Trade in 1947.

• The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade.

- GATT’s membership grew from 19 to more than 120 nations

- Tariff reduction was spread over eight rounds of negotiation

- GATT regulations were enforced by mutual monitoring system

1980-1993:

Protectionist Trends

• The world trading system came under strain during the 1980s and early 1990s because

- Japan’s economic success trained what had been more equal trading

patterns.

- Persistent trade deficits by the U.S caused significant problems in some industries and political problems for the
government.

- Many countries found that although GATT limited the use of tariffs, there were many other forms of intervention that
had the same effect that did not technically violate GATT.
THE URUGUAY ROUND AND THE WTO

The Uruguay and the WTO

• Against the background of rising pressures for protectionism, in 1986 GATT members embarked on their eight rounds
of negotiations to reduce tariffs, “The Uruguay Round.” • This was the most difficult round of negotiations yet, primarily
because it was also the most ambitious

• The Uruguay Round dragged on for 7 years before an agreement was reached December 15, 1993. It took effect on
July 1, 1995.

The Uruguay and the WTO

Provisions in Uruguay Round:

1. Tariffs on industrial goods were to be reduced by more than 1/3 and tariffs were to be scrapped on more than 4% of

manufactured goods.

2. Average tariff rates imported by developed nations on manufactured goods were to be reduced to less than 4% of

value.

3. Agricultural subsidies were to be substantially reduced.

4. GATT fair trade and market access rules were to be extended to cover a wide range of services.

5. GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks
(intellectual property).

6. Barriers on trade in textiles were to be significantly reduced over 10 years.

7. The World Trade Organization was to be created to

implement the GATT agreement.

SERVICE

• In 2007, world trade in services amounted to $3.260 billion compared to world trade in goods of $13,570 billion.
Ultimately, extension of GATT rules to this important trading arena could significantly increase both the total share of
world trade accounted for by services and the overall volume of world trade.

• As a result of Uruguay Round negotiations, GATT member introduced the General Agreement on Trade in Services or
GATS.

Intellectual Property

• The extension of GATT rules to cover intellectual property will make it much easier for high-technology companies to
do business in developing nations where intellectual property have been poorly enforced.

• To harmonize the IPR protections around the world and to encourage enforcement of those provisions, countries
created an IPR agreement called the “Trade-Related Aspects of Intellectual Property Rights Agreement or TRIPS
The World Trade Organization

• The WTO acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on
service and the other on intellectual property.

• The WTO taken responsibility for arbitrating trade disputes and monitoring the trade policies of member countries.

WTO Experience to Date

• By 2011, the WTO had 153 members, including China, which joined at the end of 2001, and those countries collectively
account for 97% of world trade. Another 25 countries, including the Russian Federation, were negotiating for
membership into the organization. Since its formation, the WTO has remained at the forefront of efforts to promote
global free trade.

• The experience so far has been encouraging, aside from the shift back occurred.

WTO as Global Police

The first decade in the life of WTO suggests that its policing and enforcement mechanisms are having a positive effect.

Expanding Trade Agreements

The WTO was also encouraged to extend its reach to encompass regulations governing foreign direct investment

The WTO in Seattle: A Watershed?

• What happened in Seattle is notable because it may have been a watershed of sorts.

• It shows the two sides of the event which include the Anti-Free Trade and the Pro-Free Trade.

ANTI-FREE TRADE (Environmentalist, Human Rights
Group, and Labor Union)
Free trade in agricultural products might
have an impact on the rate of global
deforestation
Child labor and working conditions are
hazardous
Trade laws that allow imports from low-wage countries
PRO-FREE TRADE (Supporter and Representatives
As countries get richer, they enact tougher
environmental and labor regulations.
WTO exists to serve the interest of its
member states, not subvert them
Using trade regulations to try impose such
practices on developing nations, they believe
it will produce a self-defeating backlash
THE FUTURE OF THE WTO

4 Issues at the fore front of the current agenda of the WTO:

1. ANTIDUMPING ACTIONS

It proliferated during the 1990s. WTO rules allow countries to impose antidumping duties on foreign goods that are
being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are
being harmed.

2. PROTECTIONISM IN AGRICULTURE

According to estimates from the International Monetary Fund, removal of tariffs and subsidies on agricultural products
would raise global economic welfare by $128 billion annually, other suggest gains as high as $182 billion

3.PROTECTING INTELLECTUAL PROPERTY

The basis for this agreement was a strong belief among signatory nations that the protection of intellectual property
through patents, trademarks and copyrights must be an essential element of the international trading system.

4. MARKET ACCESS FOR NONAGRICULTURAL GOODS AND SERVICES

The WTO and GATT have made a big stride in reducing the tariff rates on non-agricultural products into developing
nations.

A NEW ROUND OF TALK: DOHA

• In the late 2001, the WTO tried again to launch a new round of talks between member states aimed at further
liberalizing the global trade and investment framework. For this meeting, it picked the remote location of Doha in the
Persian Gulf

State of Qatar.

• The agenda agreed upon at Doha should be seen as a game plan for negotiations over the next few years.

• In general, though, if successful, the Doha Round of negotiations could significantly raise global economic welfare.

IMPLICATIONS FOR MANAGERS

What are the implications of all of this for business practice? Why should the international manager care about the

political economy of free trade or about the relative merits of arguments for free trade and protectionism?

1. TRADE BARRIERS AND FIRM STRATEGY

• Trade Barriers constrain a firm's ability to disperse its productive activities as it raises the cost of exporting products to
a country.

2. POLICY IMPLICATIONS

• Government policies regarding international trade can have a direct impact on business.