The Political

Economy of
International Trade
Outline of Chapter :
☆ Instruments of Trade Policy
 Tariffs
 Subsidies
 Import Quotas &Voluntary Export Restraints
 Local Content Requirement
 Administrative Policies
 Antidumping Policies
 Tariffs

Voluntary
Subsidies Quotas Export
Restraints

Local
Admini- Anti-
Content
strative dumping
Require- Policies Policies
ments
1. tariffs : tax on imports
1) two categories
＊ Specific tariffs:
fixed charge for each unit
3$ per barrel of oil
＊ Ad valorem tariffs:
tax for the value
EU on bananas from Latin America – tariff 15 to 20% by
the value on the first 2.5 million tons of import
2) Who gains:
--- government
raising revenue for government
--- domestic producers
protecting against foreign
competitors
3) Who suffers: consumers
paying more for certain imports
4) Effect of import tariffs:
--- pro-producers and anti-consumers
why anti-consumers: restriction of
supply, so domestic price high
----- reducing the efficiency of the world

economy
why protecting domestic firms:
because they can’t compete with
foreign products successfully.
 foreign products: more efficient
 inefficient use of resources

Winners: 
 - Government (revenues)
 - Local industries/producers
 - Employees of protected
 industries keep their jobs

Losers: 
 - Local consumers
 (price high and quality low)
 - Employees of protected industries
 do not develop new skills
 Key definition
 A tariff is a tax levied on imports.
Specific tariffs are levied as a fixed
charge for each unit of a good
imported. Ad valorem tariffs are levied
as a proportion of the value of the
imported good.
 2. subsidies :
1) definition:
a government payment to a domestic
producer
2) the field subsidized:
＊ agriculture : largest beneficiary of
subsidies
e.g.: the European Union, the U.S., Japan
＊ manufacturing: much lower but
significant
3) the objective of subsidy:
helping domestic firm
--- to be a first-mover
--- to be a major global
company
--- to gain
4) negative effect:
--- many not successful
--- protecting inefficiency
--- limiting trade
--- decreasing wealth

Winners: 
 - Local producers and workforce


Losers: 
 - Direct cost to tax payers
- Foreign competitors
 Key definition

 A subsidy is a government payment to

a domestic producer. Subsidies take
many forms including cash grants, low-
interest loans, tax breaks, and
government equity participation in
domestic firms.
3. import quotas and Voluntary export
restraints (VER)
1) definition:
import quotas: restriction on quantity
of imports
2) Tariff rate quota
tariff rate:
lower for imports within the quota,
higher for imports over the quota

goal: limiting imports over quota

US has quota on cheese imports. The only firms allowed to
import cheese are certain trading cos. Each of which is
allocated the right to import a maximum number of pounds of
cheese each year.
3) voluntary export restraints (VER):

quota by exporting country

Why exporting countries restraint their own
export:
--- fearing heaving tariffs or quotas
--- making the best of a bad situation
4) negative effect
--- benefiting domestic producers
(less efficient)
--- high price for consumers
5) e.g. automobile
sugar

Winners: 
 - Local producers and workforce


Losers: 
 - Consumers
 - Foreign competitors (exporting
countries)
 Key definition
 An import quota is a direct restriction
on the quantity of some good that may
be imported into a country. The
restriction is usually enforced by
issuing import licenses to a group of
individuals or firms.
 Key definition

 A voluntary export restraint is a quota

on trade imposed by the exporting
country, typically at the request of the
importing country’s government.
 E.g. Limitation on auto exports to the
US enforced by Japanies automobiles
in 1981.
 4. local content requirement
 1) definition:
 specific fraction produced
 domestically
 ---- by physical term
 ---- in value term
 75% of components for the product must be produced
locally
 75% of the value for the product must be produced locally
 2) the function
 ---- developing countries:
 shifting from simple assembly to
 manufacture
 ---- developed countries:
 protecting local jobs and from
 competition
 eg: US government preference, 51%
 3) effect:
 --- benefit domestic producers
 --- high price for consumers

Winners: 
 - Local support industries
acting as suppliers of local
manufacturers
- Local workforce

Losers: 
 - Local consumers
(prevented from buying foreign-made
goods)
 Key definition
A local content requirement is a
requirement that some specific
fraction of a good be produced
domestically.
 5. Administrative policies
 1) definition:
 ---- rules: making it difficult for imports
 ---- informal policies
 eg: Japan: ﹡cutting tulip bulb
 ﹡opening express package
 France: a small customs entry point
 2) effect
 --- benefiting producers
 --- hurting consumers
 Netherland’s Export

Winners: 
 - Local producers and employees


Losers: 
 - Local consumers
 Key definition

 Administrative trade policies are

bureaucratic rules that are designed to
make it difficult for imports to enter a
country.
 6. Antidumping policies
 1) dumping:
 selling goods in a foreign market :
 at the price:
 (1) below cost
 (2) below fair market value
 2) aims of dumping:
 ---- unloading excess products
 ---- predatory (take others’ benefits)

 behavior: driving competitors

 out of the market.
 ---- earning profit
 3) antidumping:
 ---aim: punishing dumping ;
 protecting domestic producers
 --- procedure:
 ﹡domestic producer: filing a petition
 ﹡ government agencies:
 (Commerce Department,)
 investigating the complaint
 ﹡ If true, imposing countervailing duties
 Countervailing duties, which represent a special tariff, can
be fairly substantial and stay in place for up five years.

Winners: 
 - Local producers and employees


Losers: 
 - Local consumers
 Key definition

 In the context of international trade,

dumping is variously defined as selling
goods in a foreign market at below their
costs of production, or as selling
goods in a foreign market at below their
“fair” market value.
Case study:
Shrimps, Turtles, and the WTO
 Chicken
Turtle
Deirochelys
reticularia
This turtle gets its
name from its
extremely long
neck that looks to
some like a
chicken's neck.
Remember this
fact if you ever
see one on land
and try to pick it
up; this species
can reach a long
way under, over,
or around its shell
to bite.
 False Map
Turtle
Graptemys
pseudogeographica
This turtle was once
common, but its numbers
have been reduced by
water pollution and the pet
trade (although it does not
fare well in captivity). Many
individuals will sometimes
pile up on a favored
basking site. It feeds on
aquatic plants, insects,
crustaceans, and mollusks.
The best way to get a good
look at shy turtles like this
is to watch them through
binoculars from a distance.
 1. introduction:
 1) event: see turtles: endangered
 2) reason: poor fishing practice:
 shrimp boats trapping turtles
 3) US reaction: law
 ---equipment: turtle-excluder
 --- banning importing shrimps
 if no such equipment
 2. case:
 1) when: in 1996
 2) who: between US and India,
 Pakistan, Malaysia, and Thailand
 3) event: lawsuit:
 ---- filed by four countries to the WTO
 against US government
 ---- arbitration panel: reviewing US
 position according to the WTO rules
 4) US claim:
 ---- protecting exhaustible resources,
 restrictions : right
 ---- supported by the World Wildlife Fund
 5) 4 countries claim: US ban
 ---- illegal under WTO: apply domestic
 legislation outside of its country.
 ---- hypocrisy (not truly kind)
 6) WTO decision:
 US in violation of WTO rules: against
 targeted countries, only to three
 countries not to all
 7) US revision in law:
 applying its to all countries which is
 consistent with WTO rules
 8) result: American import ban stays on.
 3. implications from the case:
 1) No discrimination is allowed in
 international trade according to
 the WTO
 2) Restrictions are allowed if with
 reasonable causes.
 III. Development of
the World Trading System
 Global Trade System
GATT
GATT since 1947
since 1947

General Agreement on Tariffs and Trade

WTO
WTO since 1995
1995
since

World Trade Organisation