1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER The Political Economy of International Trade

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues How do governments use policy to restrict imports and promote exports? Why do some governments intervene to influence import-export flows? Is such government intervention self- defeating? What is the evolution, purpose of the global trading system (GATT, WTO)? What are the implications on business of government intervention?

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Governments and Trade Free trade: a government does not restrict what its citizens can but from or sell to another country Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy Higher level domestic consumption; more efficient use of resources Stimulation of domestic growth and wealth creation Slide 5-1

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Governments and Trade More often governments manage trade (… level the playing-field) –Restriction of imports: protectionist intervention –Promotion of exports –Trade promo and FDI incentives Free-trade Good or Bad? –Social issues related to free-trade –Implications for business and individual groups Slide 5-2

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Instruments of Trade Policy Tariffs Subsidies Import quotas Voluntary export restraints Local content requirements Anti-dumping policies Administrative policies Slide 5-3

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Taxes levied on imports (also sometimes on exports) –Specific tariff: fixed charge for each good imported –Ad valorem tariff: a % of imported goods value Who gains: –Government –Domestic producers (at least in the short run) –Employees of protected industries keep their jobs Who loses: –Consumers who pay higher prices –The economy which remains inefficient –Employees of protected industries who dont develop new skills Tariffs Slide 5-4

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Subsidies Are government payments to domestic producers –Cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders Subsidies are aimed at lower costs to help –Compete against cheaper imports –Gain export markets –Increase domestic employment –Local producers achieve first-mover advantage in emerging industries Governments tax individuals… to pay for subsidies Consumers buy more expensive goods with lower disposable incomes Slide 5-5

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Import Quotas and Voluntary Export Restraints –Import quota: government specifies how much of what product can be imported from which countries –Voluntary export restraint: a quota imposed by the exporting country officially or unofficially Local Content Requirements –Some % of a good has to be produced domestically with local raw materials and local labor –Used by LDCs to Achieve technology transfer, skills transfer Shift manufacturing base to a higher technological level –Similar effects to those of import quotas Slide 5-6

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Anti-dumping Policies –Dumping: selling goods in an overseas market At below their production costs or Below fair market value –Anti-dumping policies punish producers who dump and protect domestic producers Administrative policies –Bureaucratic rules that make it difficult for imports to enter a country Slide 5-7

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Political Arguments for Intervention National security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives Economic Arguments for Intervention Infant industry protection Strategic trade policy Slide 5-8

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Trade Cooperation (!) U.S.A. and: –foreign companies trading with Cuba –any company dealing with Iran-Iraq W.T.O. in place but... –disputes with China dealt on bilateral basis –disputes with Japan dealt on bilateral basis –trade blocks proliferating Slide 5-9

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Global Trading System Smith to Great Depression –Britain adopts free trade in 1846 –Smoot-Hawley act (US) 1930 aimed at employment protection one cause of the Great Depression 1947-1979: GATT, Trade Liberalization, Economic Growth 1980-1993: GATT needs fixing –Uruguay round of GATT negotiations (1986-1993) –Creation of WTO with powers to implement trade agreements Slide 5-10

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. GATT Pre-WWII protectionism –Smoot-Hawley +57% import tariffs (1930) –UK, France, Italy followed suit –world depression in 30s Havana Conference (1947) -> GATT –125 countries by 1994 –small staff in Geneva –tariffs fm 40% in 47 to 3% in 95 –trade 15x to $6.75 trillion in 92 WTO superceded GATT in 1995 Slide 5-11

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. GATT/WTO MFN-Most Favored Nation –any preferential treatment offered to one member country must be extended to all other members –members can extend MFN to non-members Exceptions –GSP (Generalized System of Preferences) for LDCs –regional arrangements such as NAFTA –countries still use NTBs, other loopholes (peanut waiver, 1955) Slide 5-12

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Uruguay Round of GATT negotiations Tariffs cut further Agricultural Policy Modified: –cut price supports 20%, export subsidies 36% –For this policy: USA, Argentina, Australia, Canada –Anti: Japan, Korea, India, EU Services given prominence: developed set of principles Intellectual Property Rights protected further: patents, copyrights, trademarks, brand names WTO created: to implement Uruguay round, controversial Slide 5-13

17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. WTO: Early Experience WTO as a global policeman –Up to 1995-1999: 160 ± cases brought for decision –30 ± withdrawn after direct discussions between countries in dispute –100 + undergoing direct discussion –20 ± in final stage of solution implementation –4 have been settled –7 closed with no need for action GATT dealt with 196 cases from 1947-1995! WTO telecommunications agreement 1998 (effect) WTO Financial Services agreement 1999 (effect) Slide 5-14

18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Future of WTO Antidumping Action Protectionism in Agriculture Protecting Intellectual Property Launching a new round of talks: Doha

19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. So what for Business Trade barriers affect firm strategy Government policy has direct impact on firm business Slide 5-15