1. Fourth Edition International Business

2. CHAPTER 5 The Political Economy of International Trade

3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-3 Chapter Focus The political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups.

4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-4 Chapter Focus The political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups. This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons.

5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-5 Chapter Focus The political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups. This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons. The chapter describes the range of intervention instruments used by governments and considers the case for free trade in light of government actions.

6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-6 The 7 Instruments of Trade Policy Antidumping Duties Local Content Requirements Tariffs Voluntary Exports Restraints Subsidies Administrative Policies Import Quotas

7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-7 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit

8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-8 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value

9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-9 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value  Oldest form of protection. 

10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-10 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value  Oldest form of protection.  Good for the Government.

11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-11 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value  Oldest form of protection.  Good for the Government.  Good for producers.

12. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-12 Tariffs: Import Taxes Tariffs could be Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value  Oldest form of protection.  Good for the Government.  Good for producers.  Leads to inefficiency.  Bad for consumers.

13. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-13 Subsidies: Help domestic producers to compete internationally Government payment to a domestic producer could Be in the form of Cash Grants Tax Breaks Low Interest Loans Government Equity Participation

14. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-14 Import Quotas and Voluntary Export Restraints Direct restriction on the quantity of a good that can be imported into a country. Import Quotas Quota on trade imposed by the exporting country at the request of the importing country’s government. VERs Quota rent

15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-15 Local Content Requirements A specific fraction of a good must be domestically produced. A specific fraction of a good must be domestically produced. Physical amount Value Widely used by developing countries to develop their manufacturing base. Used by developed countries to protect local jobs and industry from foreign competition.

16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-16 Administrative Policies Bureaucratic rules designed to make it difficult for imports to enter a country.

17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-17 Protect Industry and Jobs. Most common political argument.

18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-18 Retaliation Risky strategy. If government fails to heed warnings and imposes its own higher tariffs, the result is higher tariffs all around and a corresponding economic loss.

19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-19 Protect Consumers Battleground for biotechnology such as hormone-treated beef and genetically altered crops.

20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-20 Further Foreign Policy Objectives Used to build relations with another country or punish it (so-called rogue states). Policy is unilateral and easily defeated by other countries ignoring it.

21. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-21 Protect Human Rights Basis for the use of “Most Favored Nation” status to persuade China to change its positions on human rights.

22. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-22 Political Arguments for Intervention Further Foreign Policy Objectives Protect Industry and Jobs. National Security Retaliation Protect Consumers Protect Human Rights

23. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-23 Economic Arguments for Intervention Infant Industry  Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton.  Protect developing country’s new industry from developed countries better established industries. Recognized by GATT.

24. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-24 Economic Arguments for Intervention Strategic Trade Policy  Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.

25. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5-25 Economic Arguments for Intervention Infant Industry Strategic Trade Policy  Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton.  Protect developing country’s new industry from developed countries better established industries. Recognized by GATT.  Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.