MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Trade Barrier, MNC & WTO

In a free trade environment, foreign goods and services are

allowed to go in and out of a country without any restrictions.

Is an economic policy taken by a government to protect

local/domestic interest from foreign competition.

Protective measures includes import taxes, quota, embargo,

export subsidies.

Examples of protectionism
 To protect politically powerful groups, such as farmers in
the USA and EU,
 To protect blue-collar jobs being lost to foreign
competition,
 To protect jobs due to offshore outsourcing and the loss
of white-collar jobs.

LYF/April 2013 SP-SMA Slide 1

Reasons for Protectionism

1. To protect infant industries (young industries)

2. To correct Balance of Trade deficit (Import>Export)
3. To diversify the economy (Start new industries)
4. To prevent dumping (sell below cost production
cost)
5. National Security (Protect national security)
6. Protect against unfair subsidised foreign
competition
7. To protect domestic labour - Flag Registry
8. Encourage Social Policies - Rural development
9. To enable industries to decline gradually - Gradual
reduction to allow time for re-training
LYF/April 2013 SP-SMA Slide 2

Reasons for Protectionism

To protect infant industries
 New industry in developing country is less efficient than
foreign competitors.
 Cannot compete with foreign competition on even
ground due to lack of skill, expertise or knowledge.
 Need more time to develop skilled management, exploit
efficient technologies.
 Need protection to give them more time to acquire the
skill, expertise or knowledge before they can compete
with foreign companies on even ground.

To correct a Balance of Trade deficit

(BOP - Import > export)
 Custom duties will cause the price of imported goods to
rise.
 Discourage consumption of foreign goods.
 Import falls, Balance of Trade back to equilibrium.
LYF/April 2013 SP-SMA Slide 3

LYF/October 2014 1
MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Reasons for Protectionism

To diversify the economy
 Avoid dependence on one or two commodities which they
have comparative advantage.
 Price fluctuation on these goods will affect national income
and employment.
 M’sia diversified her economy into industrial and agricultural
sectors rather than concentrating on rubber and tin.

To prevent dumping
 Foreign producer dumping goods in the country below cost
of production.
 Domestic production disrupted.
 Foreign producers force domestic producers out of biz and
world market to gain greater market share.
 Foreign producers get to monopolise the market and raise
prices. Detrimental to local consumers and country.

LYF/April 2013 SP-SMA Slide 4

Reasons for Protectionism

National Security
 To protect an industry which is important for national
security.
 A country does not want to be dependent on foreign
energy suppliers or foreign steel.

Protect against “unfair”( subsidised) foreign
competition
 Foreign countries subsidise their goods
 These goods can be sold cheaper than local goods.
Unfair to local producers. Local goods will be in demand if
no protection is given.

Retaliation
 To retaliate against another country who has imposed
trade restriction that hurt domestic producers.

LYF/April 2013 SP-SMA Slide 5

Reasons for Protectionism

Encourage Social Policies

 To maintain a balance between urban and rural life and
population.
 To protect agricultural industries from external
competition
 To minimise further depopulation of the countryside.

To enable industries to decline gradually

 Some industrial countries may find that they cease to
have comparative advantage in certain industries, eg
textile in UK, steel plants in USA.
 They need to transfer their factors of production into
specialisation in other areas.
 Protection is provided in the short run to allow time for
other industries to develop.
 To pick up slack in the labour market.

LYF/April 2013 SP-SMA Slide 6

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MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Protectionism

Exchange controls
 Limits on the amount of foreign exchange made available to
importers or to citizens travelling abroad, or for investment.
 To restrict the movement of money out of the country
 To maintain a country’s rate of exchange

Embargo
 Complete prohibition of the export or import of specific
commodities.
 As a measure of protection for social and political reasons

Subsidies
 Payment by a government agency to the producers of
goods to lower the price of goods.
 Export subsidies - such as special tax reliefs, the provision
of cheaper raw materials or a special lower charge to
reduce the cost of production to compete in international
market. SP-SMA Slide 7
LYF/April 2013

Barriers to Free Trade

(Methods of carrying out Protectionism)

1. Tariffs - imposed tax ($)

2. Quota - limit amount of import (Qty)

3. Exchange control - limit local currency going out

4. Embargo - Ban trading with a particular country

5. Subsidies - Subsidies export

LYF/April 2013 SP-SMA Slide 8

Barriers to Trade
(Methods of controlling International Trade)

1. Tariffs

 Tax imposed by the importing country when good crosses

an international boundary.
 Provide revenue to government
 Price of import goods is higher than local goods
 Local goods become more competitive
 Gainers are domestic producers and government
 Domestic producers - Price and quantity supply increase
 Losers are domestic consumers and foreign suppliers.

LYF/April 2013 SP-SMA Slide 9

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MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Protectionism - Quota

A quantitative restriction on the import of a particular good.

Specifies the max. amount of the good that may be imported in
a given time.

Restrict the amount the foreign producers can sell

Cause the price of foreign goods to increase

Demand of local goods will increase and price to go up

Gainers are domestic producers and government
 Domestic producers - Price and quantity supply increase

Losers are domestic consumers and foreign suppliers.

LYF/April 2013 SP-SMA Slide 10

Impact of Quota

Supply
Price
Supply line

P2

P1

Demand

Q1 Q
Quantity
LYF/April 2013 SP-SMA Slide 11

Reasons for Growth of MNC

Firms that operate business units in many nations.

Reasons for growth of MNC:

Raw material, labour and land seekers

Domestic and regional market seekers

Cost Minimisers

Minimise geographical risks (close to consumers)

Economic risks - tariff

Political risks (expropriation risk)

Political stability

LYF/April 2013 SP-SMA Slide 12

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MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Reasons for Growth of MNC

Foreign exchange stability

Savings in freight costs, logistic

Tax concessions

Available finance

Technical collaboration to spread development costs
and secure new products

Higher profits

LYF/April 2013 SP-SMA Slide 13

Advantages of MNC

Host countries welcome the establishment of

MNC:
 Bring employment
 Create more jobs
 New technology
 Bring new technology
 Increase growth
 More production, more income
 Increase export
 More goods are manufactured and sold
 GDP
 Exchange of skill
 Transfer of skill

LYF/April 2013 SP-SMA Slide 14

World Trade Organisation (WTO)

The only organisation body dealing with the rules of

trade between nations.
Location: Geneva, Switzerland
Established: 1st January 1995
Created by: Uruguay Round Negotiations (1984-
1990)

WTO is a inter-governmental organisation. The main

decision making bodies are councils and committees
consisting of the WTO entire membership.

LYF/April 2013 SP-SMA Slide 15

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MA5030 Lesson 2 – Trade Barrier, MNC & WTO

Functions of WTO

Administering WTO trade agreement

Forum for trade negotiations . Organise trade
negotiations to achieve further liberalisation

Settle trade disputes between governments

Monitoring national trade policies

Technical assistance and training for developing
countries

Co-operations with other international organisations

Help trade flow smoothly in a system based on rules

LYF/April 2013 SP-SMA Slide 16

Tutorial
Who wants to be a billionaire?

1. Assume a bushel of wheat is being sold at $4 and the

demand by domestic consumers are 400 bushel.
Out of the 400 bushel, 100 bushels are being supplied by
domestic suppliers and the balance 300 bushels are being
supplied by import.
A tariff of $0.50 per bushel is applied to all imported wheat.

Discuss the effect of tariff on

(i) Demand of local and foreign wheat.
(ii) Domestic consumer
(iii) Domestic supplier
(iv) Foreign supplier
(v) Government

LYF/April 2013 SP-SMA Slide 17

Tutorial
Who wants to be a billionaire?

2. Describe the reasons for countries to practise protectionism.

3. Describe the different methods of carrying out protectionism.

4. State the functions of WTO.

5. State the reasons for the growth of MNC.

6. Describe the advantages that MNC brings to host countries.

7. Describe the advantages and disadvantages of free trade.

LYF/April 2013 SP-SMA Slide 18

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