Slide global business today chap005 the political economy of international trade

The Political Economy of International Trade The Political Economy of International Trade 5... • What are the implications on business of government intervention?... Governments and T

The Political Economy of

International Trade

The Political Economy of

International Trade

5

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?

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

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

Instruments of Trade Policy

• Tariffs

• Subsidies

• Import quotas

• Voluntary export restraints

• Local content requirements

• Anti-dumping policies

• Administrative policies

• 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 don’t develop new skills

Tariffs

• 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

• 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

• 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

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

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

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

• 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

• 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)

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

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)

• Antidumping Action

• Protectionism in Agriculture

• Protecting Intellectual Property

• Launching a new round of talks: Doha

“So what” for Business”

• Trade barriers affect firm strategy

• Government policy has direct impact on firm business