The political economy of International Trade (Ch-5) Chapter outline 1.Introduction 2.Instruments of trade policy 3.The case for government intervention 4. Development of World Trading System

Instruments of trade policy Tariff barriers: Taxes Non-Tariff barriers 1.Subsidies 2. Import quotas and voluntary export restraints 3. Local content requirements 4. Antidumping policies 5. Administrative policies

Tariff A tariff is a tax levied on imports. Tariffs fall into two categories: Specific tariffs & Ad valorem tariffs. Specific tariffs: Specific tariffs are levied as a fixed charge for each unit of a good imported. Ad valorem tariffs: Ad valorem tariffs are levied as a proportion of the value of the imported goods.

Who Suffers & who gains through tariff The government gains, because the tariff increases govt. revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Who suffers? Consumers suffer, because they must pay more for certain imports.

Subsidies A subsidy is government payment to a domestic producer. Subsidies take many forms including cash grants, low interest loans, tax breaks & government equity participation in domestic firms. By lowering production costs, subsidies help domestic producers in two ways: They help them compete against foreign imports. They help them gain export markets.

Import quotas and voluntary export restraints An import quota is a direct restriction on the quantity of some good that may be imported into a country. This restriction is usually enforced by issuing import licenses to a group of individuals or firms.

Voluntary export restraint A voluntary export restraint is a quota on trade imposed by the exporting country, typically at the request of the importing country’s govt.

Local content requirements A local content requirement is a requirement that some specific fraction of a good be produced domestically. The requirement may be expressed either in physical terms (75% of component parts for this product must be produced locally) or in value terms (75% of the value of this product must be produced locally). It also tend to benefit producers & not customers.

Administrative policies In addition to the formal instruments of trade policy, govt. of all types sometime use informal or administrative policies to restrict imports & boost exports. Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country.

Antidumping policies In the context of international trade, dumping is 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. “Fair” market value of a good is normally judged to be greater than the costs of producing that good.

The case for govt. intervention Political arguments for intervention Protecting jobs & industries National security Retaliation Protecting customers Furthering foreign policy objectives Protecting human rights Economic arguments for intervention The infant industry argument Strategic trade policy

Protecting jobs & industries US automobile, machine tool, & steel industries during the 1980s were motivated by such consideration Japan’s quotas on imports of rice are aimed at protecting jobs in that country’s agricultural sectors.

National security To protect certain industries because they are important for national security. Defense related industries often get this type of attention. Example: Aerospace, advanced electronics, semiconductors etc.

Retaliation Some argue that govt. should use the threat to intervene in trade policy as a bargaining tool to help open up foreign markets and force trading partners to “play by the rules of the game”.

Protecting customers Many govt. have regulations in place to protect consumers from unsafe products. In 1998, the Clinton administration decided to permanently ban imports into the US of 58 types of military-style assault weapons.

Furthering foreign policy objectives Govt. sometimes use trade policy to support their foreign policy objectives in order to build strong relations with foreign countries.

Protecting human rights Govt. sometimes use trade policy to try to improve the human rights policies of trading partners.

Economic arguments for intervention The infant industry argument Govt. should temporarily support new industries (with tariffs, quotas & subsidies) until they have grown strong enough to meet international competition. Strategic trade policy It is argued that by appropriate actions govt. can raise national income that allowed firms to gain first-mover advantage.

Contd. The second argument is that govt. should intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already first-mover advantage.