Jakarta, 20 April 2010 Economic Department University of Indonesia Strategic Trade Policies (course 13) Pos M. Hutabarat, PhD

Pos M. Hutabarat PhD Trade and Economy Economy Exports Production capacity Foreign Exchange Fix capital Imports Machinery Technology Trade Industry

Pos M. Hutabarat PhD Composition of GDP GDP Agriculture Industry Services

Pos M. Hutabarat PhD Industrialization Process Industrialization Trade policies Export promotion Import substitution High growth

Pos M. Hutabarat PhD Trade and Industrialization Export Promotion model: Develop industrial sector through export oriented industry with example of Korea, Taiwan, RRC, Malaysia and Thailand (instrument : duty draw back, tax incentives, subsidies, devaluation of currency, etc) Import Substitution model: Develop industrial sector by supporting import substitution domestic industries with example of Latin America (instrument: high tariff, quota, non- tariff, etc)

Pos M. Hutabarat PhD TRADE POLICIES Tariff (percentage increase on import price) Nominal tariff Effective tariff Non-Tariff Quota (limitation of import quantity) Standards Custom procedures Dumping/Subsidy Non-economy (environment, labor and human rights, IPR, etc)

Pos M. Hutabarat PhD Value Added Creation (from agriculture to industry) Roasted US$ 1200/ton Powder US$ 2500/ton Starbuck US$ 2,5/gelas Coffee bean US$ 600/ton dryer Mill Promosi, restaurant

Pos M. Hutabarat PhD Value Added Creation (from agriculture to industry) kacang kering Rp 22000/kg Kacang pedas Rp 36000/kg Peanut butter Rp 52000/kg kacang polong Rp 6000/kg dryer Mixed spicy Mill and pengemasan

Pos M. Hutabarat PhD Value Added Creation (from mining to industry) Biji besi US$ 50/ton Baja lembaran US$ 700/ton Mesin diesel US$ 5400/ton Biji besi US$ 20/ton transportasi teknologi proses teknologi produk

Pos M. Hutabarat PhD Trade Policies 1.Developing Countries (developing vs developed countries, agreement on primary commodities) 2. Developed Countries (strategic trade policies, industry vs industry)

Pos M. Hutabarat PhD Strategic Trade Policies Trade policies to develop specific industrial sector in world oligopoly market to increase social welfare of a country Government impose protection (by high tariff rates) or subsidize domestic industry to increase its competitiveness versus competitors in domestic and world markets

Pos M. Hutabarat PhD Strategic Trade Policies James Brander dan Barbara Spencer (1995) are the first scholars to develop idea of Strategic Trade Policies by using cases of Boeing and Airbus in the form of Game Theory model. Competition rivalry between Boeing and Airbus to become an example of oligopoly competition in many study of business school in the last 20 year. This idea start from Japanese success to develop steel industry (1950’s); semiconductor (1970’s); and Europe for Concorde and Airbus (1970’s). Indonesia developed aircraft industry IPTN (now DI) but failed. Malaysia also tried auto industry Proton (almost fail)

Pos M. Hutabarat PhD Game Theory One of important model to analyze modern business competition. When we assume there are only exist 2 companies, therefore profits (or lost) of one company are depend on other company’s decision, though both companies have no information about other competitor’s decision. But both companies understand that the consequences of each competitor’s decision, based on its own decision

Pos M. Hutabarat PhD Prisoners Dilemma Case Ali Badu Confessed Not Confessed Not `A B Not

Pos M. Hutabarat PhD Boeing vs Airbus

Pos M. Hutabarat PhD Competition and Strategic Trade Policy Boeing Airbus discount Don’t discount discount don’t discount Don’t B A Export airplane to the world

Pos M. Hutabarat PhD Competition and Strategic Trade Policy Malaysia Indonesia Discount Don’t discount Discount Don’t Discount Don’t M I Export CPO to the world

Pos M. Hutabarat PhD Free Trade and Strategic Trade Policy country A country B Free Trade Protection Free Trade Protection Free Trade Protection A B

Pos M. Hutabarat PhD Japan Strategic Trade Policy 1970 :worlds semiconductor industry were dominated by USA 1975 : Japan (through MITI) developed semiconductor industry by granting some facilities to domestic industries such as: 1. Imposing high tariff rates 2. Tax incentives for investment on semiconductor industries 3. R&D financing 1985: Japan become leading in world semiconductor production

Pos M. Hutabarat PhD US Strategic Trade Policy : There are >100 producer of motorcycles in USA 1978 : Harley Davidson the only one producers which survive, others went bankruptcy because they could not compete with imports : Government imposed high tariff rates for motorcycles 1984 : Market share of imports declined from 60-70% to 31% : Exports of motorcycles from USA increased 31%/per year : Shares value of Harley Davidson increased from US$ 35 to US$ 236

Pos M. Hutabarat PhD Economic Scale and Duopoly Model (H and F sales to third Country) X H sales X* F sales F H O A B C E X 2 X 1 X* 2 X* 1 Reaction function H and F, slope negative

Pos M. Hutabarat PhD Economic Scale and Duopoly Model (H and F sales to third Country, export subsidy in H) X H sales X* F sales F H O E X* E H’ E’ XEXEXEXE by subsidy in H, cost of production decrease, production increase, export increase, reaction function shift to the right

Pos M. Hutabarat PhD Economic Scale and Duopoly Model (H and F sales to third Country, export subsidy in H) X H sales X* F sales F H O E X* E H’ E’ XEXEXEXE by subsidy in H, cost of production decrease, production increase, export increase, reaction function shift to the right F’ E’’

Pos M. Hutabarat PhD Strategic Trade Policies (problems) There are some problems of imposing this strategy: 1.It is difficult to choose a certain sector 2.When all developed countries imposing STP, the net effects are not significant 3.When one country success in imposing STP, probably others will retaliate