Global Business Today 10e by Charles W.L. Hill and G. Tomas M. Hult McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Source: Si wei/AP Images The Global Trade and Investment Environment Chapter 7: Government Policy and International Trade McGraw-Hill Education.
Learning Objectives LO 7-1Identify the policy instruments used by governments to influence international trade flows. LO 7-2Understand why governments sometimes intervene in international trade. LO 7-3Summarize and explain the arguments against strategic trade policy. LO 7-4Describe the development of the world trading system and the current trade issue. LO 7-5Explain the implications for managers of developments in the world trading system. McGraw-Hill Education.
Opening Case: Is China Dumping Its Excess Steel Production? Produced half the worlds output of steel by 2015 Bottom fell out of Chinese domestic market for steel Need to export unwanted product even at a loss Low-priced exports impacting global steelmakers negatively U.S. producers claim China is dumping product U.S. Commerce Department implemented duties European Union considering similar measures McGraw-Hill Education. Introduction
Free trade refers to a situation where a government does 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 McGraw-Hill Education. Instruments of Trade Policy 1 of 10 Seven main instruments of trade policy 1. Tariffs 2. Subsidies
3. Import quotas 4. Voluntary export restraints 5. Local content requirements 6. Administrative policies 7. Antidumping duties McGraw-Hill Education. Instruments of Trade Policy 1 of 9 Nontariff barriers include 1. Subsidies 2. Quotas 3. Voluntary export restraints 4. Antidumping duties
McGraw-Hill Education. Instruments of Trade Policy 2 of 9 Tariffs A tariff is a tax levied on imports that effectively raises the cost of imported products relative to domestic products Specific tariffs: levied as a fixed charge for each unit of a good imported Ad valorem tariffs: levied as a proportion of the value of the imported good McGraw-Hill Education.
Instruments of Trade Policy 3 of 9 Tariffs continued Increase government revenues Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods Force consumers to pay more for certain imports Tariffs are generally pro-producer and anticonsumer Import tariffs reduce the overall efficiency of the world economy McGraw-Hill Education.
Did You Know? Did you know that the high price of SUVs in the US is the result of the "chicken tariff"? Click to play video McGraw-Hill Education. Instruments of Trade Policy 4 of 9 Subsidies Subsidy: a government payment to a domestic producer Subsidies help domestic producers Compete against low-cost foreign imports
Gain export markets Consumers typically absorb the costs of subsidies McGraw-Hill Education. Instruments of Trade Policy 5 of 9 Import Quotas and Voluntary Export Restraints Import quota A direct restriction on the quantity of some good that may be imported into a country Tariff rate quota 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 Voluntary export restraint (VER) Quota on trade imposed by the exporting country, typically at the request of the importing countrys government Quota rent The extra profit that producers make when supply is artificially limited by an import quota McGraw-Hill Education. Figure 7.1 Hypothetical Tariff Rate Quota
Jump to Appendix 1 long image description McGraw-Hill Education. Instruments of Trade Policy 6 of 9 Export Tariffs and Bans Export tariff is a tax placed on the export of a good Goal is to discriminate against exporting Export ban is a policy that partially or entirely restricts the export of a good Ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic oil at home
McGraw-Hill Education. Instruments of Trade Policy 7 of 9 Local Content Requirements (LCR) A local content requirement demands that some specific fraction of a good be produced domestically Can be in physical terms or in value terms Local content requirements benefit domestic producers and jobs, but consumers face higher prices McGraw-Hill Education. Is Having a Local Content Requirement a Good
Idea? Local content requirements refer to a specific fraction of a product that needs to be manufactured domestically. Basically, LCRs establish a minimum level of local content required under trade law when giving foreign companies the right to manufacture in a particular place. In the wake of the economic downturn in 2008, many economists feared that some governments would institute protectionist policies similar to the tariff escalations during the Great Depression of the 1930s. However, most public policy officials avoided traditional forms of protection (e.g., tariffs, quotas). This led some observers to underestimate the degree of protectionism. Instead, what had happened was that so-called nontariff barriers in the form of local content requirements had become increasingly popular. As a (1) citizen of a specific country and (2) as a global customer, do you think local content requirements help you as a citizen of a country, as a global customer, as both, or as neither?
Source: G. C. Hufbauer and J. J. Scott, Local Content Requirements: A Global Problem Washington, D.C., Peterson Institute for Global Economics, 2013. McGraw-Hill Education. Instruments of Trade Policy 8 of 9 Administrative Policies Administrative trade polices: bureaucratic rules that are designed to make it difficult for imports to enter a country These polices hurt consumers by denying access to possibly superior foreign products McGraw-Hill Education.
Instruments of Trade Policy 9 of 9 Antidumping Policies Dumping: selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their fair market value Objective is to protect domestic producers from unfair foreign competition May be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out, and later raising prices and earning substantial profits U.S. firms that believe a foreign firm is dumping can file a complaint with the government
If the complaint has merit, antidumping duties, also known as countervailing duties may be imposed McGraw-Hill Education. The Case for Government Intervention 1 of 4 Political arguments Concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) Economic arguments Concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)
McGraw-Hill Education. The Case for Government Intervention 2 of 4 Political Arguments for Intervention Protecting jobs and industries Protecting national security Retaliating Use intervention as a bargaining tool and force trading partners to play by the rules of the game Protecting consumers
Ban unsafe products Furthering foreign policy objectives Grant preferential trade terms to a country it wants to build relations with Pressure or punish rogue states Protecting human rights
McGraw-Hill Education. The Case for Government Intervention 3 of 4 Economic Arguments for Intervention The infant industry argument An industry should be protected until it can develop and be viable and competitive internationally This argument has been criticized because It is useless unless it makes the industry more efficient If a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds McGraw-Hill Education.
The Case for Government Intervention 4 of 4 Economic Arguments for Intervention continued Strategic trade policy By appropriate actions, government can help raise national income if it can ensure first-mover advantages in an industry are domestic Might be beneficial for a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms with first-mover advantages McGraw-Hill Education. Trading with Cuba
Even though the United States holds trade sanctions with Cuba, other Western countries continue to trade with the island nation. Source: Adalberto Roque/AFP/Getty Images McGraw-Hill Education. The Revised Case for Free Trade 1 of 3 New trade theorists believe government intervention
in international trade is justified Classical trade theorists disagree Some new trade theorists believe that while strategic trade theory is appealing in theory, it may not be workable in practice they suggest a revised case for free trade McGraw-Hill Education. The Revised Case for Free Trade 2 of 3 Retaliation and Trade War Krugman: strategic trade policies to establish domestic firms in a dominant position in a global industry are
beggar-thy-neighbor policies that boost national income at the expense of other countries A country that attempts to use such policies will probably provoke retaliation A trade war could leave both countries worse off Dont engage in retaliation but help establish rules to minimize the use of trade-distorting subsidies McGraw-Hill Education. The Revised Case for Free Trade 3 of 3 Domestic Policies Governments can be influenced by special interest groups A governments decision to intervene in a market may appease a
certain group, but not necessarily support the interests of the country as a whole Krugman sees this as a further reason for not embracing strategic trade policy McGraw-Hill Education. Development of The World Trading System 1 of 8 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)
McGraw-Hill Education. Do You Believe in Free Trade Agreements? The benefits of free trade agreements are often hard to see. At the same time, the benefits of protecting certain industries and/ or companies from foreign competition are often very visible. Given these scenarios, many people often argue that free trade agreements are bad for their country. Perhaps as a result, many governments impose many tariffs, quotas, and other nontariff barriers to trade. For example, the common perception is that by establishing trade barriers, a country keeps the jobs at home instead of jobs being shipped overseas. But is this really true? Source: D. J. Boudreaux, The Benefits of Free Trade: Addressing the Myths (Washington, DC: Mercatus Center,
George Mason University, 2013). McGraw-Hill Education. Development of The World Trading System 2 of 8 From Smith to the Great Depression Up until the Great Depression of the 1930s, most countries had some degree of protectionism The U.S. enacted the Smoot-Hawley Act (1930): created significant import tariffs on foreign goods Other nations took similar steps and as the depression deepened, world trade fell further McGraw-Hill Education.
Development of The World Trading System 3 of 8 1947-1979: GATT, Trade Liberalization, and Economic Growth The General Agreement on Tariffs and Trade (GATT) was established in 1947 Multilateral agreement to liberalize trade and gradually eliminate barriers to trade Tariff reduction was spread over eight rounds Very successful in early rounds McGraw-Hill Education. Development of The World Trading System 4 of 8
1980-1993: Protectionist Trends Japans economic success strained 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 McGraw-Hill Education. Development of The World Trading System 5 of 8
The Uruguay Round and the World Trade Organization Uruguay Round emphasized services, intellectual property, and agricultural subsidies Trade issues related to services and intellectual property and agriculture were emphasized Dragged on for seven years The World Trade Organization The WTO encompassed GATT, the General Agreement on Trade in Services (GATS), and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) Procedures subject to strict time limits McGraw-Hill Education.
Development of The World Trading System 6 of 8 WTO: Experience to Date Members account for 98% of world trade It was hoped that it would emerge as an effective advocate and facilitator of future trade deals So far, most countries have adopted WTO recommendations for trade disputes In general, countries involved in disputes accept WTO recommendations Global telecommunication and financial service industries targeted for reform McGraw-Hill Education.
Development of The World Trading System 7 of 8 The Future of the WTO: Unresolved issues and the Doha Round Anti-dumping actions Encourage members to strengthen the regulations governing the imposition of antidumping duties Protectionism in agriculture Concerned with the high level of tariffs and subsidies in the agricultural sector of many economies Protecting intellectual property Members believe that the protection of intellectual property
rights is essential to the international trading system McGraw-Hill Education. Protecting Agriculture Removing barriers to trade and subsidies in agricultural products should benefit consumers. Source: Mark Elias/Bloomberg/Getty Images McGraw-Hill Education.
Development of The World Trading System 8 of 8 The Future of the WTO: Unresolved issues and the Doha Round continued Market access for nonagricultural goods and services Tariffs on services remain higher than on industrial goods A new round of talks Doha McGraw-Hill Education.
Have been ongoing since 2001 concerned with cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, limiting the use of antidumping laws Development of The World Trading System 8 of 8 The Future of the WTO: Unresolved issues and the Doha Round continued Multilateral and Bilateral Trade Agreements
Designed to capture gain from trade beyond those agreements currently attainable under WTO treaties Tariff barriers raise the costs of exporting products to a country Quotas may limit a firms ability to serve a country from locations outside that country A firm may have to locate more production activities in a given market than it would otherwise. The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country Policy Implications McGraw-Hill Education.
Focus on Managerial Implications 1 of 2 TRADE BARRIERS, FIRM STRATEGY, AND POLICY IMPLICATIONS Trade barriers impact firm strategy Tariff barriers raise the costs of exporting Quotas may limit a firms ability to serve a country Firms may need to conform to local content requirements Future trade barriers can influence firm strategy
Firms can play a role in promoting free trade or trade barriers McGraw-Hill Education. Focus on Managerial Implications 2 of 2 Policy Implications International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies Three drawbacks to government intervention Self-defeating as it protects the inefficient Dangerous as it might invite retaliation
Unlikely to be well-executed as can be captured by special interest groups McGraw-Hill Education. Summary In this chapter we have Identified the policy instruments used by governments to influence international trade flows. Understood why governments sometimes intervene in international trade. Summarized and explained the arguments against strategic trade policy. Described the development of the world trading system
and the current trade issues. Explained the implications for managers of developments in the world trading system. McGraw-Hill Education.
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