Instruments of Trade Policy

and Barriers to Free Trade

K.K.
K.K.
Governments and Trade
 More often
governments manage
trade
(… level the “playing-
field”)

 For political
Economic and
“social” reasons!
 Protectionism?

K.K.
Agricultural Subsidies &Development
 Rich nations provide $ 300 bn as subsidies
 2$ a day for every cow in EU
 EU farmers exports and Dumps sugar beet
produces>>>>>>>>South Africa
 US cotton subsidies depresses world
market>>>>> Brazil ,India ( $1 bn loss)
 “Developed nations give foreign aid of $ 50
bn per year ,to developing word, agricultural
subsidies cost producers in the developing
world some $ 50 bn,in lost exports ,effectively
canceling out the effect of the aid” –UN

K.K.
 In 2001, Mali lost $43m in export
revenues due to plunging cotton prices ,
significantly more than the $37m in
foreign aid it received from the US that
year”
 Elimination of agricultural subsidies and
price support to developing world
producers- Oxfarm
 Rich nations spend more than $300
billion a year to subsidize their farmers
 Subsidies create surplus production

K.K.
 Surplus production leads to dumping and
depressed prices
 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)

K.K.
Instruments of Trade Policy
 Tariffs  Local Content
Requirements
 Subsidies
 Anti-dumping
Policies
 Import Quotas

 Voluntary Export
 Administrative
Restraints(VERs) Policies

K.K.
 Tariffs
 Taxes levied on imports (also
sometimes on exports)
– Specific tariff: fixed charge for each
good imported
• $3/ barrel of Oil
– Ad valorem tariff: a % of imported
goods value
• 20% on Latin American Banana Imports
by EU
 Pro producer anti consumer
K.K.
Tariffs
 Tariffs still exist in US?
– March 2002 US in steel Industry……8-30% tariffs
on steel imports
 Pro-producer and anti consumer
– Japanese consumer pays $ 890 per year due to
tariffs (1989)
 Tariff reduces the overall efficiency of the
world economy
– US consumer lost $233.4b in 1996 alone!

K.K.
 Who gains:
– Government ,gets revenue
– 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
Tariffs are pro producer and anti consumer,.,., it
reduces the over all efficiency of the world
economy

K.K.
 Subsidies
 Are government 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 industries
 Governments tax individuals… to pay for
subsidies
 Consumers buy more expensive goods with lower
disposable incomes

K.K.
 Agricultural Subsidies:
Japan- $ 21, 000 per farmer,.,
EU - $ 19,000 per farmer,USA- $19,000,
and Canada - $ 8000 per farmer,,, in
2002 EU met subsidies of 43$ b

 Results
– Inefficient farmers
– Over production
 It’s the Taxpayer’s money?

K.K.
Import Quotas and Voluntary
Export Restraints
 Import quota: government specifies how
much of what product can be imported from
which countries
– Direct restriction on the quantity of some good that
may be imported
• @ US quota on Cheese
 Voluntary export restraint(VER): a quota
imposed by the exporting country officially or
unofficially
– @Japan’s VER with US on Automobile Exports,
1981- up to 1.85 million vehicles per year !

K.K.
 The extra profit “ quota rent” will be
made by the producers when supply is
artificially limited by import quota!
 Benefits producers by limiting import
competition
– Japan – limited 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

K.K.
 The Multi Fibre Arrangement (MFA)
( Agreement on Textile and Clothing (ATC))
 Governed the world trade in textiles and
garments from 1974 through 2004,
 Imposing quotas on the amount developing
countries could export to developed
countries. It expired on 1 January 2005.
 HK based ESQUEL Group
– Biggest shirt exporters to USA
– Due to quota right ,.,. To China
– Malaysia
– Mauritius
– Mexico
– Jamaica – N American FTA….
All using Chinese labor !

K.K.
Local 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
– Buy American Act!

K.K.
Administrative policies
– Bureaucratic rules that make it difficult for imports to
enter a country
 Bureaucratic rules designed to make it
difficult for imports to enter a country.
– France – video tapes
 Japanese ‘masters’ in imposing rules.
– Tulip bulbs.
– Federal Express

By Safeguards, Health Standards, Customs

Procedures, Consular Formalities, Environment
Protection etc.,.,.,

K.K.
Anti-dumping Policies
– Dumping: selling goods in an overseas
market
• At below their production costs or
• Below “fair market value”
– 1997 SK manufacturer of semiconductors
( LG and Hyundai) selling DRAMs in US
Mkt…… US imposed 9-4% antidumping
duties !

K.K.
 – Types
• Sporadic Dumping
• Intermittent Dumping- Predatory Dumping
• Long Period Dumping
– Anti-dumping policies punish producers
who dump and protect domestic producers
– File a petition with the
Govt…….countervailing duties!

K.K.
Antidumping cases by WTO
members

K.K.
Trade Barriers
 Tariff Barriers  Non Tariff Barriers
– Quotas
– VER
– Administered Protection

K.K.
 Indian Case : the peak level of tariff
from 300% to 25% in 2003 ( but
excluding Agri. And Dairy products)

K.K.
Arguments for Intervention

 Political
 Economic

K.K.
Political Arguments for Intervention
 Protection Jobs and Industries
– But decreases international competitiveness
– US is protected from Japan and Tai
Machine tools imports
 National security
– Defense related industries
– US and India
 Individual industries and jobs protected

K.K.
 Retaliation
– US Vs China on IPRs of Microsoft
 Consumer protection (health, safety)
– From unsafe products
– US ban on imported weapons
– EU ban on Hormone treated Beef
– GM seeds?
 Furthering foreign policy objectives
– Trade policy to support foreign policy
– Preferential trade relations
– Punish rough states
 Protection Human Rights!
– Trade policies as a Political Weapon
– US on HR issues with China
– “HR issues should be decouples from Trade” Clinton

K.K.
Economic Arguments for
Intervention
 Infant industry protection
– Of the developing countries
– BUT is it makes industries efficient? Is that
because of non availability of Capital?
 Strategic trade policy
– First Mover Advantage by Govt. Help( Boeing)
– Counter rivals first move initiatives by govt.
help( Airbus)
– To face competition
– Japan’s LCD Screens
– Indian Software Story?

K.K.
K.K.
Shrimps-turtles and WTO

 Source: World trade Organization ,

http://www.wto.org/english/tratop_e/envir_e/edis08_e.htm

K.K.
Non-tariff barriers to trade can
be:
 State subsidies, procurement,
trading, state ownership
 Occupational safety and health
regulation
 Employment law
 Import licenses
 Export subsidies
 Quota shares
Source: en.wikipedia.org/wiki/Non-tariff_barriers_to_trade
K.K.
Non-tariff barriers
 Foreign exchange controls and multiplicity
 Over-elaborate or inadequate infrastructure
 "Buy national" policy.
 Intellectual property laws (patents, copyrights)
 Bribery and corruption
 Unfair customs procedures
 Restrictive licences
 Import bans
 Seasonal import regimes
Source: en.wikipedia.org/wiki/Non-tariff_barriers_to_trade

K.K.
 Thank U

K.K.