Slide global business today chap005 the political economy of international trade

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CHAPTER

5

The Political Economy of
International Trade
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Key Issues
• How do governments use policy to restrict imports
and promote exports?
• Why do some governments intervene to influence
import-export flows?
• Is such government intervention self-defeating?
• What is the evolution, purpose of the global
trading system (GATT, WTO)?
• What are the implications on business of
government intervention?

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Slide
5-1

Governments and Trade
• Free trade: a government does not restrict what its
citizens can but from or sell to another country
• Smith, Ricardo, Heckscher-Ohlin: free trade
enhances economy
• Higher level domestic consumption; more
efficient use of resources
• Stimulation of domestic growth and wealth
creation

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Slide
5-2

Governments and Trade
• More often governments manage trade
(… level the “playing-field”)
– Restriction of imports: protectionist intervention
– Promotion of exports
– Trade promo and FDI incentives

• Free-trade “Good” or “Bad”?

– Social issues related to free-trade
– Implications for business and individual groups

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Slide
5-3

Instruments of Trade Policy
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Tariffs
Subsidies
Import quotas
Voluntary export restraints
Local content requirements
Anti-dumping policies
Administrative policies
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Slide
5-4

Tariffs
• Taxes levied on imports (also sometimes on exports)
– Specific tariff: fixed charge for each good imported
– Ad valorem tariff: a % of imported goods value

• Who gains:
– Government
– 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
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Slide
5-5

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
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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
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5-6

• Import Quotas and Voluntary Export
Restraints
– Import quota: government specifies how much of
what product can be imported from which countries

– Voluntary export restraint: a quota imposed by the
exporting country officially or unofficially

• 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

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5-7

• Anti-dumping Policies
– Dumping: selling goods in an overseas market
• At below their production costs or
• Below “fair market value”

– Anti-dumping policies punish producers who dump
and protect domestic producers

• Administrative policies
– Bureaucratic rules that make it difficult for imports

to enter a country

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Slide
5-8

Political Arguments for Intervention
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National security
Individual industries and jobs protected
Retaliation
Consumer protection (health, safety)
Furthering foreign policy objectives

Economic Arguments for Intervention
• Infant industry protection
• Strategic trade policy
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Slide
5-9

International Trade Cooperation (!)
• U.S.A. and:
– foreign companies trading with Cuba
– any company dealing with Iran-Iraq

• W.T.O. in place but...
– disputes with China dealt on bilateral basis
– disputes with Japan dealt on bilateral basis
– trade blocks proliferating

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5-10

The Global Trading System
• Smith to Great Depression
– Britain adopts free trade in 1846
– Smoot-Hawley act (US) 1930 aimed at employment
protection one cause of the Great Depression

• 1947-1979: GATT, Trade Liberalization,
Economic Growth

• 1980-1993: GATT needs fixing
– Uruguay round of GATT negotiations (1986-1993)
– Creation of WTO with powers to implement trade
agreements
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Slide
5-11

GATT
• Pre-WWII protectionism
– Smoot-Hawley +57% import tariffs (1930)
– UK, France, Italy followed suit
– world depression in ‘30s

• Havana Conference (1947) -> GATT
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125 countries by 1994
small staff in Geneva
tariffs fm 40% in ‘47 to 3% in ‘95
trade 15x to $6.75 trillion in ‘92

• WTO superceded GATT in 1995

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Slide
5-12

GATT/WTO
• MFN-Most Favored Nation
– any preferential treatment offered to one member
country must be extended to all other members
– members can extend MFN to non-members

• Exceptions
– GSP (Generalized System of Preferences) for
LDCs
– regional arrangements such as NAFTA
– countries still use NTBs, other loopholes (peanut
waiver, 1955)

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5-13

Uruguay Round of GATT negotiations

• Tariffs cut further
• Agricultural Policy Modified:
– cut price supports 20%, export subsidies 36%
– For this policy: USA, Argentina, Australia, Canada
– Anti: Japan, Korea, India, EU

• Services given prominence: developed set of principles
• Intellectual Property Rights protected further: patents,
copyrights, trademarks, brand names

• WTO created: to implement Uruguay round, controversial

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5-14

WTO: Early Experience
• WTO as a global policeman
– Up to 1995-1999: 160 ± cases brought for decision
– 30 ± withdrawn after direct discussions between
countries in dispute
– 100 + undergoing direct discussion
– 20 ± in final stage of solution implementation
– 4 have been settled
– 7 closed with no need for action

• GATT dealt with 196 cases from 1947-1995!
• WTO telecommunications agreement 1998 (effect)
• WTO Financial Services agreement 1999 (effect)
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The Future of WTO
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Antidumping Action
Protectionism in Agriculture
Protecting Intellectual Property
Launching a new round of talks: Doha

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Slide
5-15

“So what” for Business”
• Trade barriers affect firm strategy
• Government policy has direct impact on

firm business

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