The Political Economy of International Trade

The Political Economy of International Trade Introduction: Many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interest of politically important groups or promote the interest of key domestic producers. When government intervene, they often do so by restricting imports of goods and services into their nation,

The Political Economy of International Trade while adopting policies that promote domestic production and exports. Normally their motives are to protect domestic producers and jobs from foreign competition while increasing the foreign market for products of domestic producers.

Instruments of Trade Policy 1. Tariffs - a tariff is a tax levied on imports or exports that fall into two categories – specific tariffs are levied as a fixed charge for each unit of a good imported and ad valorem tariffs are levied as a percentage/proportion of the value of the imported good. The impacts of tariffs are government gains through revenue, domestic producers gain and consumers lose.

Instruments of Trade Policy 2. Subsidies – a subsidy is a government payment to a domestic producer that take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. By lowering production costs, subsidies help domestic producers in two ways such as competing against foreign imports and gaining export markets.

Instruments of Trade Policy Drawbacks of this subsidy are (a) allow inefficient farmers to stay in business (b) encourage countries to produce products that could be grown more cheaply elsewhere and imported (c) encourage countries to overproduce heavily subsidized products and (d) reduce international trade.

Instruments of Trade Policy 3. Import quotas – An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms. 4. Voluntary export restraints – a voluntary export restraint is a quota on trade imposed by the exporting country, typically at the request of the importing country’s government. It benefits domestic producers by limiting import competition.

Instruments of Trade Policy 5. Local content requirements – a local content requirement is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms or in value terms. It provides protection for a domestic producer of parts in the same way an import quota does, by limiting foreign competition.

Instruments of Trade Policy 6. Administrative policies – administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. 7. Antidumping policies – dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their fair market value. It is viewed as a method by which firms unload excess production in foreign markets. Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition.

The case for the government intervention Government of a country can intervene in international trade of that country for the best interest of the common people and specially for the domestic producers. Government intervention is supported from two different viewpoints such as political arguments are concerned with protecting the interest of certain groups within a nation and economic arguments are typically concerned with boosting the overall wealth of a nation.

The case for the government intervention Protecting jobs and industries National security Retaliation (revenge) Protecting consumers Furthering foreign policy objectives Protecting human rights The infant industry argument Strategic trade policy.

Free Trade and Protection Trade 1. Free trade – free trade is a system of commercial policy where there is no distinction between domestic and foreign commodities and where none is favored or none is disfavored. It refers complete absence of tariff, quota, exchange restriction, tax, production subsidy, utilization of factors of production and consumption. Actually it is the external trade system of liberalism that opposes any of intervention where the state is with the free play of economic forces.

Free Trade and Protection Trade Arguments for free trade: Maximization of social output International specialization Proper utilization of natural resources Opportunity to export surplus goods Increase income of factors of production Protection of monopoly business Ensure competitive price in world market.

Free Trade and Protection Trade Arguments against free trade: Dependency on foreign countries International confliction Practice of dumping Imbalanced economic growth Threat to infant industry Threat to national security Threat to domestic producers Violation of human rights

Free Trade and Protection Trade 2. Protection trade – it refers to those policies that create a divergence between the relative prices of commodities to domestic consumers and their relative prices in the world market. When the government of a particular country imposes different types of restrictions such as issuance of import license, import and export duties, tax on specified items and fixation of quantity of import for controlling purpose in order to safeguard domestic products then this is called protection trade.

Free Trade and Protection Trade Arguments for protection trade: Protection of infant industries Protection of sick industries Expansion of home/domestic market Ensuring favorable position on balance of payment Domestic employment creation Diversification of industries Attainment of self sufficiency

Free Trade and Protection Trade Arguments against protection trade: Monopolistic exploitation Barriers for consumers’ freedom Inequalities in income distribution of the world Underutilization of resources Decrease world production and consumption No specialization in production

Free Trade vs Protection Trade International specialization World’s production and consumption Benefits to consumers and sellers Monopolistic competition Utilization of resources Consumption of non-produced products Dependency on other countries Volume of import and export Terms of trade and balance of payment position.

Reasons for Free Trade Increased Competition Stabilized Commodity prices Mobility of labor resources Mobility of capital resources Decreases in the total price of goods (taking away taxes or tariffs) Transportation costs would be the only major cost of trading Protect against countervailing or manipulative taxes Helps against export subsidies and industrial policies of other nations Helps prevent shortages or surplus of economic goods

Reasons for Free Trade & Forecasting demand and market conditions would be easier Helps Reduce Poverty Helps disseminates democratic values Increasing commerce makes wars less likely Free trade encourages and brings about allies in the world Free trade enriches cultures Generates economic growth Promotes innovation and competition