Chapter 6 - Instruments of trade and investment policies. The main goals of this chapter are to: Undertake an historical overview of main government policies that have influenced international trade, examine the major types of barriers that are currently affecting international trade and investment, examine the major types of export-enhancement measures and their impact on international business.
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Chapter 6 Instruments of trade and
investment policies
Protectionism Free Trade
the trade policy pendulum
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Lecture plan
• Protectionist vs free trade policies prior to World War 2
• Barriers to trade
– e.g tariff and non-tariff barriers, barriers
to services
• Export enhancement measures
– subsidies
– financial assistance
– marketing assistance
• Arguments pro and against protection
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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
• Trade liberalisation after World War 2
– GATT, IMF, World Bank, OECE (OECD)
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Two groups of trade policy
instruments
• Protection measures
– barriers to trade in goods and services
• Export enhancement measures
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Barriers to trade and investment
• Tariff barriers
• Non-tariff barriers (e.g quotas,
standards, procurement policies)
• Export restrictions
• Import restrictions
• Barriers to trade in services
• Financial limits (e.g exchange controls, profit remittance limits)
• Limits on FDI entry and operations
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Trade and tariff barriers
• Tax imposed on imported physical goods
– effects of an indirect tax
• Tariffs
– oldest form of trade policy
– specific, ad valorem and compound duties
• Good for government
• Good for producers
– but reduces efficiency
• Bad for consumers
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Measuring tariff schedules
—unweighted average
• A = 10%
• B = 5%
• C = 8%
• D = 7%
10+5+8+7
• UWA = - = 7.5%
4
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Measuring tariff schedules
—weighted average
ATR = (10 x 0.10) +
(5 x 0.60) + (8 x 0.15) + (7 x 0.15) =
1 + 3 + 1.2 + 1.05 =
6.35%
Product Imp’s ID US$m (%)
Weights: A (0.10); B (0.60);
C (0.15): D (0.15).
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Price effects of an import duty
• A rise in domestic prices of less than
amount of 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 amount of duty
(e.g import supply schedule is perfectly elastic)
• No change in price (e.g sole buyer)
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Non-tariff barriers: import quotas
• Import quota
– restriction on quantity of some goods 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’)
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Other non-tariff barriers
• Anti-dumping duties; can be used for
protection against foreign competition, but can be also justified
• Measures regarding safety, health,
marketing, labelling, packaging and
technical standards; generally justified, but can can become protectionist when
excessive
• Procurement policies
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Trade defence instruments
• Anti-dumping duties
– leading initiators: India, US, EU,
Argentina, South Africa and Australia – most affected economies: China, Korea Rep., Chinese Taipei, Japan and Russia
• Countervailing (anti-subsidy) duties
• Safeguards
• Need for simplification and clarification of WTO rules
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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)
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Trade barriers: barriers to services
trades
• ‘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
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Foreign investment controls
• Rejection of all foreign direct investment
• Limitations on FDI (Mexico, Malaysia,
South Korea)
• Local content regulations
• Export performance
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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
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Export enhancement measures
• Export processing zones
• Marketing assistance
• marketing support (e.g AUSTRADE)
• Trade-related investment measures
• export performance requirements
• local equity requirements (waivers)
• Countertrade requirements
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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)
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Arguments pro-protection
• Infant industry
• Self-sufficiency (national defence)
• Employment
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Arguments against protection
• Inefficient allocation of resources
• Income redistribution
• Reduction in well-being
• Current Australian government policies on protection
– tariff debate
– industry assistance