Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Chapter 6: Instruments of Trade and Investment Policies International Trade Policies FREE TRADE PROTECTIONISM The Trade Policy pendulum 4 -1

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea TOPIC PLAN: Protectionist vs.Free Trade policies prior to World War 2 Barriers to Trade – e.g.tariff and non-tariff barriers,barriers to services etc. Export Enhancement Measures – Subsidies – Financial assistance – Marketing assistance etc. Arguments pro and against protection

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea The “Pendulum” of trade policy: Between Free Trade and Protectionism Mercantilism (16th century) – Trade surplus.Protectionism “Laissez-Faire” – David Ricardo (early 19th century): Free trade Great Depression: Neo-Mercantilism – Protectionism up in the US,UK,France etc. Trade Liberalisation after World War 2 – GATT,IMF,World Bank, OECE (OECD)

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Two groups of trade policy instruments Protection measures – Barriers to trade in goods and services Export Enhancement Measures

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Barriers to trade and investment Tariff barriers Non-tariff barriers (e.g. quotas, standards, procurement policies) Export restrictions Barriers to trade in services Financial limits (e.g. exchange controls, profit remittance limits) Limits on FDI entry and operations

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Trade Barriers:Tariff Barriers Tax imposed on imported physical goods; – Effects of an indirect tax Tariffs - oldest form of trade policy –Specific-Ad valorem- Compound duties Good for government Good for producers –But reduces efficiency Bad for consumers

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Measuring Tariff Schedules -Unweighted Average- A=10% B=5% C=8% D=7% UWA= =7.5% 4

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Measuring Tariff Schedules -Weighted Average- ATR=(10X0.10)+ (5X0.60) + (8X0.15)+ (7X0.15)= = 6.35% ProductImp’s ID(%) US$m. A10010 B6005 C1508 D1507 WEIGHTS:A(0.10),B(0.60) C(0.15),D(0.15)

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Price effects of an import duty A rise in domestic prices of less than the amount of the duty (e.g. when a large trading country like the US can influence world prices.Supply schedules of foreign products are inelastic). Price rise equal to the amount of the duty (e.g.import supply schedule is perfectly elastic). No change in price (e.g. sole buyer).

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Non-Tariff Barriers: Import Quotas Import Quota: –Restriction on the quantity of some good imported into a country. Quotas (Quantitative Restrictions) – Unilateral quotas – Negotiated bilateral or unilateral quota e.g. “voluntary export quotas” – Tariff quotas – Embargoes/Import bans (“zero imports”) 4 -11

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Other non-tariff barriers Anti-Dumping duties; can be used for protection against foreign competition, but can be also justified. Measures regarding safety, health, marking, labelling, packaging and technical standards; Generally justified, but can can become protectionist when excessive. The Procurement policies

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Trade barriers:Export restrictions Export Bans – Timber logs (Malaysia) – US Trade with Cuba,Libya Export duties/Taxes – Tax on grain exports (Argentina) Minimum export prices (e.g. Brazil on coffee) Exclusive exports by state-trading enterprises (e.g. India)

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Trade Barriers: Barriers to services trade “National Content’ in shipping Sole rights to domestic insurance business Limitations for foreign banks Bilateral agreements in air transport Lack of protection for copyrights/trademarks 4 -14

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Foreign Investment Controls Rejection of all foreign direct investment Limitations on FDI (Mexico, Malaysia, South Korea) Local content regulations Export performance

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Export Enhancement Measures Subsidies – export subsidies under agricultural assistance schemes Financial Assistance, e.g. – export credit support; – export credit insurance Tax incentives – tax holidays; – tax concessions – indirect-tax concessions 4 -15

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Export Enhancement Measures Export processing zones Marketing assistance – marketing support (e.g. AUSTRADE) Trade-related investment measures – Export performance requirements – Local equity requirements (waivers) Counter-trade requirements

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Australian government policies to promote exports Multilateral negotiations (e.g. the Cairns group) Regional initiatives (e.g. APEC) Bilateral agreements (e.g. Australia-New Zealand CER) Trade promotion and publicity (e.g. export market development grants)

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Arguments pro-protection the ‘infant industry’ the ‘self-sufficiency’ (‘national defence’) the ‘employment’

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Arguments against protection Inefficient allocation of resources Income redistribution Well-being reduction Current Australian government policies on protection –Tariff Debate –Industry Assistance