2OBJECTIVESTo realize the rationales of governmental policies that enhance and restrict tradeTo interpret the effect of pressure groups on trade policiesTo understand the comparison of protectionist rationales used in high-income countries with those used in low –income countries’ economiesTo comprehend the potential and actual effect of governmental intervention on the free flow of trade
3To understand the major means by which trade is restricted and regulated To grasp the business uncertainties and business opportunities created by governmental trade policies
4INTRODUCTIONThis chapter begins by reviewing the economic and the non economic rationales for trade protectionism ,followed by an explanation of the major forms of trade controls and their effects on companies’ operating decisions.Protectionism –Government restrictions on imports and occasionally on exports that frequently give direct or indirect subsidies to industries to enable them to compete with foreign production either at home or abroad.
5PHYSICAL AND SOCIETAL INFLUENCES ON PROTECTIONISM AND COMPANIES’ COMPETITIVE ENVIRONMENT
6CONFLICTING RESULTS OF TRADE POLICIES Governments intervention in trade to attainEconomic,Social orPolitical objectives.Governmental officials apply trade policiesTo benefit the nation and its citizensTheir political longevity
7Conflicting objectives Determining the best way to influence trade is complicatedReason - frequent conflicts in the effects of policies.Government would also like to help struggling companies and industries without penalizing those who doing wellThis goal is often impossible –especially if other countries retaliate against their protectionist actionsEg :-U.S. gave tax breaks to aid its exporters, but the 25-nation EU related with import taxes that hurt such U.S. companies’ export sales as Al-Edmonds for shoes and Northland Forest Products for specialty lumber
8Proposals for trade regulation reform often spark fierce debate among people and groups that believe they will be affectedStakeholders/Interest groups –Those that are most directly affected(Workers, Owners, Suppliers, and Local politicians)Eg :-U.S. stakeholders whose livelihood depends on a U.S. base of clothing production are fighting the elimination of import-restricting quotasIndividual consumers often misinterpret how much retail prices rise because of import restrictionsEU restrictions on banana imports cost EU consumers about $2 billion a year because of higher banana costs, a significant amount in total but trivial for each banana or for each consumer
9RATIONALES FOR GOVERNENT INTERVENTION IN TRADE EONOMIC RATIONALES- Prevent unemployment- Protect infant industries- Promote industrialization- Improved position compared to other countriesNONECONOMIC RATIONALS- Maintain essential industries- Deal with unfriendly countries- Maintain or extend spheres of influence- Preserve national identity
10ECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION UnemploymentInfant-Industry ArgumentIndustrialization ArgumentEconomic Relationships with other Countries10
111. UNEMPLOYMENTThe most effective pressure group for import restrictions- Time and incentive to picket companies- Contact governmental representatives and confront organizationsEg:- Unemployed U.S. steelworkers pressured U.S. lawmakers to apply tariffs and quotas to restrict steel imports in order to preserve their jobs and pensions11
12Two factors can ease the effects of retaliation Small trading countries are less important in the retaliation processRetaliation that decreases employment in a capital-incentive industry may not affect employment as much as the value of the trade loss would implyEven if no country retaliates, the restricting country may gain jobs in one sector only to lose jobs elsewhere.Eg. Lower imports – Lower import handling jobs12
13Possible Costs of Import Restrictions If import restrictions do increase domestic employment, fellow citizens will have to bear the cost ofHigher pricesHigher taxesGovernment officials should compare the,- Costs of higher prices with the cost of unemployment and displaced production that would result from free trade&- Costs of policies to ease the plight of displaced employees, such as for unemployment benefits or retrainingEfforts to reduce unemployment through import restrictions are usually ineffective.13
142. INFANT-INDUSTRY ARGUMENT Alexander Hamilton in 1972Infant-Industry ArgumentThe government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it is able to compete on its own.The infant-industry argument says that production becomes more competitive over time due to,- Increased economies of scale- Greater worker efficiency14
15The government can recoup the costs of trade protection through, The economies of scale and employees’ higher productivity will enable a company to manufacture efficiently, thereby positioning it to compete internationallyThe government can recoup the costs of trade protection through,- Higher domestic employment- Lower social costs- Higher tax revenue15
16Which creates 2 problems, Risk - Although it is reasonable to expect production cost to decrease overtime, they may never fall enough to create internationally competitive products.Which creates 2 problems,Some industries grow to be competitive because of governmental protectionThere are companies, which are early losses & lately gained benefits without any public help.16
17Subsidized companies to keep price levels– Tax payers Infant-industry protection requires government to make subsidies to lower the product prices of protected companies.Subsidized companies to keep price levels– Tax payers2. Production subsidies – Reduce the amount that that government can spend elsewhere.17
183. INDUTRIALIZATION ARGUMENT Countries seek protection to promote industrialization because that type of productionBrings faster growth than agriculture- Surplus workers can more easily increase manufacturing out put than agricultureBrings in investment funds- If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted areaDiversifies the economy- Export prices of agricultural products fluctuate very much, which is detriment to economies that depend on few of them18
19- Import substitution and export promotion Brings more income than primary products- The terms of trade for emerging economies may deteriorate because,Demand for primary products grow slowly & Production cost savings for primary products will be passed on to consumersReduces imports and promotes exports- Import substitution and export promotion- Import substitution is not the best approach to develop new industries due to higher prices and taxesHelps the nation-building process- Build infrastructure- Advance rural development & enhance rural social life- Boost the skills of the workforce19
20When a country shifts from agriculture to industry, Demands on social and political services in cities may increaseOutput increases if the marginal productivity of agriculture worker is very low – Need to adopt improved agricultural practicesDevelopment possibilities in the agriculture sector may be overlooked20
214. ECONOMIC RELATIONSHIPS WITH OTHER COUNTRIES There are four main motivations to promote domestic producersBalance of Payments Adjustments- A trade deficit creates problems for nations with low foreign exchange rates- Governments improve their balance of payments by improving their balance of tradeEg. Devaluation of currency & import restrictionComparable Access or “Fairness”- Domestic producers may be disadvantaged if their access to foreign market is less than foreign producers’ access to their market21
22Restrictions as a Bargaining Tool - The imposition of import restrictions may be used as a means to persuade other countries to lower their import barriersPrice-Control Objectives- Keep up word prices- Lead to substitute- Keep domestic prices down by increasing domestic supply- Give purchasers less incentive to increase output- Shift foreign production and sales- To penetrate foreign market, Eg. Dumping22
23Rationales for government intervention Economic Rationales for government interventionNon-economic Rationales for government intervention
24Non-economic rationales for government intervention Maintenance of essential industriesPrevention of shipments to unfriendly countriesMaintenance or extension of spheres of influenceProtecting activities that help preserve the national identity
25Maintenance of essential industries The essential-industry argument – (Governments apply trade restrictions to protect essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war.)e.g.: U.S. government subsidize the domestic silicon production.Determine which ones are essentialConsider cost & alternativesOnce an industry receives protection, it is difficult to remove it because the protected companies, their employees, trade unions and politicians demand for continue protection even though the rational is not exists.e.g.: U.S continues to subsidize its mohair producers more than 20 years since mohair was no longer essential for military uniforms.
26Prevention of shipments to unfriendly countries Prevent the export of strategic goods that might fall in to the hands of potential enemies (even to friendly countries) or that might be in short supply domestically.e.g.: U.S. government prevented export of data-encryption.e.g.: Nine Chinese companies and an Indian businessman sold technology to Iran regarding the chemical and conventional weapons programmes. Then, US forbade to export goods in to US and prevented US companies from exporting to them.
27Prevention of shipments to unfriendly countries cont.. Use of trade sanctions has been controversial (pp 233)Facts not in favor of sanctionsTrade sanctions against Cuba were supposed to topple the Castroregime but four decades later he was still in powerWho really suffers? Political leaders still get whatever they need, so that the costs of sanctions are borne by innocent people. eg: sanctions against Iraq
28Prevention of shipments to unfriendly countries cont… Facts not in favor of sanctions cont..Sometimes impose trade sanctions based on one issue rather than countries overall record. eg: suggested sanctions against brazil to restrict the cutting of Amazon forest.
29Prevention of shipments to unfriendly countries cont… Facts in favor of sanctionsIt can refuse products used child slaves eg: Cocoa production in ivory costSanction succeededUS & UK sanctions against ZimbabweIndian sanction against Nepal
30Maintenance or extension of spheres of influence Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodiesEg: The UE has given preferential treatment of bananas from certain former colonies.Eg; China delayed permission for Allianz, a German Insurance Group, to operate in china after Germany gave a reception for Dalai Lama.
31Protecting activities that help preserve the national identity To protect the collective identity, countries limit foreign products and services in certain sectors.Eg: For many years Japan, South Korea andChina maintained an almost total ban on riceimports, largely because rice farming has beena historically cohesive force in each nation.Eg: Canada relies on a ‘cultural sovereignty’ argument to prohibit foreign ownership or control of publishing, cable TV and book selling.Eg: France protects its cinema industry out of fearthat invasion of English language and Anglo Saxonculture will weaken its cultural identity.Eg: Korea requires theaters to show Korean films at least 146 days per year
33“Buy local” legislations Standards & Labels Quantity controlsQuotas“Buy local” legislationsStandards & LabelsSpecific permission requirementsAdministrative delaysReciprocal RequirementsRestrictions on service
34PriceDSTax – Increased the price & decrease the quantity soldP2P1Q2Q1QuantityDirect price influence
35TariffsGovernments charges tariffs when on a good when it crosses the an official boundaries of a countrySource of Government incomeExport tariffsTariffs collected by the exporting countryUse by the countries which are exporting raw materialsTransit tariffCollected by the country through which the goods have passed the borderEg: Singapore
36Import tariffsTariffs collected by the importing countryIncrease the price of the imported goodsMake the price advantage for domestically produced goodsProtective even though there is no domestic production in direct competition(Curtail demand on imported goods – Political)
37Tariffication methods Specific dutyCharge per unit basisAd Valorem dutyCharge as a % of value of the itemCompound dutyCharge both the specific duty & Ad valorem duty on the same good
38Tax controversy – Industrial countries No tariffs on importation of raw materials but tax on processed materialsAd valorem tax on based on total value (raw materials + processing cost)Emerging economies argue that the Effective tax rate on manufactured goods more than the published rate.Eg: Assume; Duty on coffee beans = 0Duty on instant coffee = 10%;If price of coffee jar $5 (Beans – $ Process - $ 2.50). The effective duty on manufacturing portion is 20% - ( ($0.5/$5)*100)
39Import restriction causes quantity sold to fall PriceS1DSP2P1Q2Q2QuantityDirect quantity influences
40SubsidiesDirect payments to domestic companies to compensate them for losses incurred from selling abroadEg: US subsidies to cotton exportersSri Lanka – Subsidies to tea exporterProvide business developments such as market information, trade expositions & foreign contactsOvercomes market imperfections rather than creating
41Aid & LoansGovernments grants loans & aids to other countriesTied aid – Recipient required to spend the funds in donor countryCommon with large contracts in emerging economies such as infrastructure developments, Telecommunication, railway & electric power projects
42Customs ValuationImporters/exporters declare a low price on invoice in order to enjoy low ad valorem tariffsUse declared invoice valueIf no invoice value/ doubtValue based on identical goods /Similar goodsIf not possibleValue based on final sales valueReasonable cost
43Sometimes use the discretionary power to assess the value too high – prevent importation of foreign productsSometimes misclassify a product & its corresponding tariffEg: IC Vs “Chemical Silicon”Other price influencesSpecial feeEg: Consuler, custom clearance, documentationMinimum price levels
44QuotasQuantitative restrictions on imports or exportsImport quotasProhibits or limit the quantity of products that can be imported in a given yearIncrease the price of the imported goodGenerate revenue to the companies which are in importing limited supplySometimes based on political or market conditionsProtect domestic producers; But not allwaysEg: Japan
45Voluntary export restrictions – Type of import quota Country A ask country B to limit exports to country A voluntarilyNot damage the political relations between those countries as much as import quotas doesExport quotasRestrictions on exports to assure the availability of goods for domestic consumers at lower pricePrevent depletion of natural resourcesAttempt to raise export price by restraining supply in foreign marketsEmbargo – Prohibit all forms of trade(To achieve political goals)
46“Buy Local” Legislations In Government purchases prefer domestic producersSome times use the price mechanismsEg: Purchase from foreign companies if price is at some predetermined margin below that of domestic competitor
47Standards & LabelsDevice classification, labeling & testing standards to allow the sale of domestic products but obstruct that of foreign – made onesEg: GMO,GMFSpecific permission requirementsRequire that potential importers or exporters secure permission from government authorities before conduct trade transactionsEg: Import license
48Foreign –Exchange control Require importer of a given product to supply to a government agency to secure the foreign currency to pay for the product.Administrative delaysSpecific permission requirements are international administrative delaysCreate uncertainty & raise the cost of caring inventory
49Reciprocal requirements Government sometimes require that exporters to merchandise in lieu of money or that they promise to buy merchandise or service, in place of cash payments, in the country to which they exportEg: McDonnell Douglas sold helicopters to British Government but had to be equip them with Rolls-Royse engines as well as transfer much of the technology & production work to the UK
50Restrictions on service Restrictions on foreign sale of services such as Transportation, Insurance, Consulting & Banking. These service industries restricted due to ;EssentialityConsider certain service industries to be essential because they strategic purposes or provide social assistance to their citizensSometimes prohibit some sectors for private companies (Foreign or Domestic)Eg: Health, Transportation
51StandardsLimits service professions to ensure practice by qualified personnel via licensingEg: Accountants, Architects, Lawyers, etc…ImmigrationGovernment regulation to organizations to hire employees locally, have to search qualified personnel extensively in domestic market before recruit from foreign country
52DEALING WITH GOVERNMENTAL TRADE INFLUENCES Governments’ intervention in trade affects the flow of imports and exports of goods between countries.When companies face possible losses because of the import competition, they have several options to deal with this situationMove operations to a lower-cost country.Concentrate on market niches that attract less international competition.Adopt international innovations-greater efficiency or superior productsTry to get governmental protection.
53If they have the given options, there are costs and risks with each option. Companies may lack the managerial, capital or technological resources to shift production abroad.They may not be able to identify more profitable product niches.Even if they try to improve their efficiency, their innovation may be quickly copied by foreign competitors.In such situations, companies often ask some protection from their government ( to restrict imports or open export markets)Example : When the Japanese automobiles compete in U.S. market, the U.S. industry sought and received protection from Japanese imports in the form of quotas.
54Can the government help every company that faces tough international competition ? No, its impossible and helping one industry may hurt another.Therefore the company should propose or oppose a particular protectionist measures that can convince government officials.And the companies must identify the key decision makers, whether they are an official of the executive branch, a member of parliament, a career civil servant.Example : Trade policies in the U.S. are often championed by members of Congress who are specially sensitive to employment and company conditions in their districts.Its important to identify and get together the other companies and groups that have a common objective to convince the officials that a particular company’s problems are not due to its specific inefficiencies but the general challenge of imports.54
55Companies can take different approaches to deal with changes with the international competitive environment. And the company’s attitudes toward protectionism are a function of investments they have made to develop their international strategy. Generally the companies that depend on free trade and those that have integrated their production and supply chains among countries tend to oppose protectionism and companies with single or multi domestic production facilities (ex: plant in Japan to serve the Japanese market) tend to support protectionism.