International Business Chapter 7: Government Policy and International Trade PDF

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Complete lecture notes from Linda Orr from Spring 2019 semester. This includes all in-class discussion notes and extra information- beyond the slides. Easy to understand format and EXTREMELY useful for studying or exams....

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Chapter 7: Government Policy and International Trade  intro  free trade: refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country  while many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups  instruments of trade policy  tariffs  tariff: a tax levied on imports that effectively raises the cost of imported products relative to domestic products  specific tariffs: levied as a fixed charge for each unit of a good imported  ad valorem tariffs: levied as a proportion of the value of the imported good  export tariffs have two objectives:  raise revenue for the government  reduce exports from a sector, often for political reason  they benefit government always, domestic companies sometimes, and hurt consumers all the time  Japanese study showed customer pay $890 more a year due to tariffs  makes global economy less efficient  subsidies  subsidy: a government payment to a domestic producer  takes many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms  subsidies help domestic producers:  compete against low-cost foreign imports  gain export markets  consumers typically absorb the costs of subsidies  according to the World Trade Organization, in mid-2000 countries spent some $300 billion on subsidies, $250 billion of which was spent by 21 developed nations  $45 billion auto bailout in 2008-2009 was a subsidy  one study estimated that if advanced countries abandoned subsidies to farmers, global trade in agriculture products would be 50% higher and the world as a whole would be better off by $160 billion  another study estimated that removing all barriers to trade in agriculture (both subsidies and tariffs) would raise world income by $182 billion  import quotas  import quota: a direct restriction on the quantity of some good that may be imported into a country  U.S. has quota on cheese imports  tariff rate quota: a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than those over the quota  cause of higher sugar prices

quota rent: the extra profit that producers make when supply is artificially limited by an import quota  voluntary export restraints  voluntary export restraints: quota on trade imposed by the exporting country, typically at the request of the importing country’s government  export tariff: a tax placed on the export of a good  goal is to discriminate against exporting to make sure host country has sufficient supply  export ban: a policy that partially or entirely restricts the export of a good  ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic oil at home  local consent requirements  local consent requirements: demand that some specific fraction of a good be produced domestically  can be in physical terms or in value terms  local consent requirements benefit domestic producers and jobs, but consumers face higher prices  ex) U.S. government required to consider American companies first  administrative policies  administrative trade policies: bureaucratic rules that are designed to make it difficult for imports to enter a country  Japan has most restrictive trade policies in the world  Netherlands exported tulips to every country in the world except Japan  these policies hurt consumers by denying access to possibly superior foreign products  antidumping duties  dumping: selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their “fair” market value  objective is to protect domestic producers from unfair foreign competition  may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out, and later raising prices and earning substantial profits  in U.S., if a foreign firm is dumping they can file a complaint with the government  if the complaint has merit, antidumping duties, also known s countervailing duties may be imposed  the case for government intervention  political arguments  concerned with protecting the interests of certain groups (normally producers), often at the expense of other groups (normally consumers)  always increases prices for consumers  protecting jobs and industries  doesn’t work  protecting national security 

 maybe works  retaliating  doesn’t work  use intervention as a bargaining tool and force trading partners to play by the rules of the game  protecting consumers  works  ban unsafe products  ex) EU banning hormone treated cows  furthering foreign policy objectives/sanctions  maybe works  grant preferential trade terms to a country it wants to build relations with  pressure or punish “rogue” states  protecting human rights  works  economic arguments  concerned with boosting the overall wealth of a nation  to the benefit of all, both producers and consumers  always increases prices for consumers  the infant industry argument  an industry should be protected until it can develop and be viable and competitive internationally  this argument has been criticized because:  it is useless unless it makes the industry more efficient  if a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds  strategic trade policy  by appropriate actions, government can help raise national income if it can ensure first-mover advantages in a domestic industry  ex) Japan LCD screens  might be beneficial for a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms with firstmover advantages  ex) U.S. airplanes  revised case for free trade  retaliation and trade war  Krugman: strategic trade policies to establish domestic firms in a dominant position in a global industry are beggar-thy national policies that boost national income at the expense of other countries  a country that attempts to use such policies will probably provoke retaliation  a trade war could leave both countries worse off  don’t engage in retaliation but help establish rules to minimize the use of tradedistorting subsidies  development of the world trading system

 from Smith to the great depression  up until the great depression of the 1930s, most countries had some degree of protectionism  the U.S. enacted the Smoot-Hawley Act (1930): created significant import tariffs on foreign goods  other nations took similar steps and as the depression deepened, world trade fell further  great depression became worse  1947-1979: GATT, trade liberalization, and economic growth  the general agreement on tariffs and trade (GATT) was established in 1947  multilateral agreement to liberalize trade and gradually eliminate barriers to trade  tariff reduction was spread over 8 rounds  very successful in early rounds (world tariffs declined by 92%)  1980-1993: protectionist tends  Japan’s economic success strained what had been more equal trading patterns  similar to china today  Japan quickly became 2nd largest economy and U.S deficit grew  persistent trade deficits by the U.S. caused significant problems in some industries and political problems for the government  many countries found that although GATT limited the use of tariffs, there were many other forms of intervention that had the same effect that did not technically violate GATT  16% of imports had non-tariff barriers such as VERs  the Uruguay Round  needed due to increased protectionism  trade issues related to services and intellectual property and agriculture were emphasized  dragged on for seven years  tariffs on industrial goods were to be reduced by more than one third, and tariffs were to be scrapped on more than 40 percent of manufactured goods  average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history  agricultural subsidies were to be substantially reduced  GATT fair trade and market access rules were to be extended to cover a wide range of services  GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks  barriers on trade in textiles were to be significantly reduced over 10 years  the World Trade Organization was to be created to implement the GATT agreement  the world trade organization  the WTO encompassed GATT, the general agreement on trade in services (GATS), and the agreement on trade related aspects of intellectual property rights (TRIPS)  procedures to arbitrate intellectual property rights subject to strict time limits

WTO experience to date:  members account for 98% of world trade  it was hoped that it would emerge as an effective advocate and facilitator of future trade deals  so far, most countries have adopted WTO recommendations for trade disputes  in general, countries involved in disputes accept WTO recommendations  has been generally seen as successful  global telecommunication and financial service industries targeted for reform  there was also a shift back toward some limited protectionism following the global financial crisis of 2008-2009. these developments have raised a number of questions about the future direction of the WTO  the future of the WTO: unresolved issues and the Doha Round  anti-dumping actions  encourage members to strengthen the regulations governing the imposition of antidumping duties  India is the biggest violator  protectionism in agriculture  concerned with the high level of tariffs and subsidies in the agriculture sector of many economies  removal of agriculture subsidies and tariffs would increase worldwide economic value by $182 billion  protecting intellectual property  members believe that the protection of intellectual property rights is essential to the international trading system  market access for nonagricultural goods and services  tariffs on services remain higher than on industrial goods  the average tariff on business and financial services imported into the United States for example is 8.2%, into the EU 8.5%, and into Japan 19.7%  given the rising value of cross-border trade services, reducing these figures can be expected to yield substantial gains  a new round of talks Doha  have been going on since 2001 concerned with cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, limiting the use of antidumping laws  agreeing on these items could bring the value of the world economy up by $300 billion  estimating the gains from trade for America  The benefits from GATT and WTO from (since 1947) amounted to roughly $1 trillion a year, or $9,000 extra income for each American household per year.  If America had complete deals with all trading partners, that additional annual gains of between $450 billion and $1.3 trillion could be realized. This final march to free trade, could safely be expected to raise incomes of the average American household by an additional $4,500 per year. 

 Jobs would be lost in certain sectors and gained in others if the country abolished all tariff barriers.  Using historical data as a guide, 226,000 jobs would be lost every year due to expanded trade, although some 2/3 of those losing jobs would find reemployment after a year. Reemployment, however, would be at a wage that was 13-14% lower.  The disruption costs would total some $54 billion annually, primarily in the form of lower lifetime wages to those whose jobs were disrupted as a result of free trade.  Offset against this, however, must be the higher economic growth resulting from free trade, which creates many new jobs and raises household incomes, creating another $450 billion to $1.3 trillion annually in net gains to the economy.  Gains exceed loses....