Lecture International trade and investment (2/e): Chapter 6 - John Gionea

Chapter 6
Instruments of trade and
investment policies

Free T
r

a de

sm
i
n
o
i
t
c
Prote

the trade policy pendulum
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–1


Lecture plan
• Protectionist vs free trade policies prior to
World War 2
• Barriers to trade

– e.g. tariff and non-tariff barriers, barriers
to services
• Export enhancement measures
– subsidies
– financial assistance
– marketing assistance
• Arguments pro and against protection
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–2


The ‘pendulum’ of trade policy:
between free trade and protectionism
• Mercantilism (16th century)
–

Trade surplus; protectionism

• ‘Laissez-faire’
–

•

David Ricardo (early 19th century): free trade

Great Depression: neo-Mercantilism

–

Protectionism up in the US, UK, France

• Trade liberalisation after World War 2
–

GATT, IMF, World Bank, OECE (OECD)

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–3


Two groups of trade policy
instruments
• Protection measures
–

barriers to trade in goods and services

• Export enhancement measures

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–4


Barriers to trade and investment
• Tariff barriers
• Non-tariff barriers (e.g. quotas,
standards, procurement policies)
• Export restrictions
• Import restrictions
• Barriers to trade in services
• Financial limits (e.g. exchange controls,
profit remittance limits)
• Limits on FDI entry and operations
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–5


Trade and tariff barriers
• Tax imposed on imported physical goods
–

effects of an indirect tax

• Tariffs
– oldest form of trade policy

– specific, ad valorem and compound duties
• Good for government
• Good for producers
– but reduces efficiency
• Bad for consumers
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–6


Measuring tariff schedules
—unweighted average
•
•
•
•

A = 10%
B = 5%
C = 8%
D = 7%
10+5+8+7
• UWA = ------------- = 7.5%
4

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–7


Measuring tariff schedules
—weighted average
ATR = (10 x 0.10) +
(5 x 0.60) +
(8 x 0.15) +
(7 x 0.15) =
1 + 3 + 1.2 + 1.05 =
6.35%

Product Imp’s
US$m.
(%)

ID

A

100

10

B

600

5

C

150

8

D

150

7

Weights: A (0.10); B (0.60);
C (0.15): D (0.15).

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–8


Price effects of an import duty
• A rise in domestic prices of less than
amount of duty (e.g. when a large trading
country like the US can influence world

prices. Supply schedules of foreign
products are inelastic).
• Price rise equal to amount of duty
(e.g. import supply schedule is perfectly
elastic).
• No change in price (e.g. sole buyer).
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–9


Non-tariff barriers: import quotas
• Import quota
– restriction on quantity of some goods
imported into a country
• Quotas (quantitative restrictions)
– unilateral quotas
– negotiated bilateral or unilateral quota
e.g. ‘voluntary export quotas’
– tariff quotas
– embargoes/import bans (‘zero imports’)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–10

Other non-tariff barriers
• Anti-dumping duties; can be used for
protection against foreign competition, but
can be also justified.
• Measures regarding safety, health,
marketing, labelling, packaging and
technical standards; generally justified, but
can can become protectionist when
excessive.
• Procurement policies
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–11


Trade defence instruments
• Anti-dumping duties
– leading initiators: India, US, EU,
Argentina, South Africa and Australia
– most affected economies: China, Korea
Rep., Chinese Taipei, Japan and Russia.
• Countervailing (anti-subsidy) duties
• Safeguards
• Need for simplification and clarification of
WTO rules

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–12


Trade barriers: export restrictions
• Export bans
–

timber logs (Malaysia)

–

US trade with Cuba, Libya

• Export duties/taxes
–

tax on grain exports (Argentina)

• Minimum export prices (e.g. Brazil on
coffee)
• Exclusive exports by state-trading
enterprises (e.g. India)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–13


Trade barriers: barriers to services
trades
• ‘National content’ in shipping
• Sole rights to domestic insurance business
• Limitations for foreign banks
• Bilateral agreements in air transport
• Lack of protection for copyrights/trademarks

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–14


Foreign investment controls
• Rejection of all foreign direct investment
• Limitations on FDI (Mexico, Malaysia,
South Korea)
• Local content regulations
• Export performance

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–15


Export enhancement measures
• Subsidies
– export subsidies under agricultural
assistance schemes
• Financial assistance, e.g.
– export credit support
– export credit insurance
• Tax incentives
– tax holidays
– tax concessions
– indirect-tax concessions
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–16


Export enhancement measures
• Export processing zones
• Marketing assistance
• marketing support (e.g. AUSTRADE)
• Trade-related investment measures

• export performance requirements
• local equity requirements (waivers)
• Countertrade requirements

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–17


Australian government policies to
promote exports
• Multilateral negotiations (e.g. the Cairns
group)
• Regional initiatives (e.g. APEC)
• Bilateral agreements (e.g. Australia–New
Zealand CER)
• Trade promotion and publicity (e.g. export
market development grants)

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–18

Arguments pro-protection
• Infant industry
• Self-sufficiency (national defence)
• Employment

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–19


Arguments against protection
• Inefficient allocation of resources
• Income redistribution
• Reduction in well-being
• Current Australian government policies on
protection
– tariff debate
– industry assistance
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

6–20