Chapter 7. Government Policy and International Trade

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1 Chapter 7 Government Policy and International Trade

2 First A Word About Trade Relationships Long-term relationships = 3 or more years Importance varies by country Value (% long-term US imports) Taiwan 67%, Mexico 65% Japan 62% Netherlands 29%, Spain & China 33% Count of Shipments (% long term US imports) Taiwan 24%, Thailand 22%, Chile 21% China 11%, Spain & Korea 13% See Chart Source: (for Top 20 US trading partners) Learning and the Value of Relationships in International Trade Federal Reserve Board - CES February, 2016

3 Introduction Free trade occurs when governments do 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

4 How Do Governments Intervene In Markets? 1. Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products Specific tariffs - levied as a fixed charge for each unit of a good imported ($/ kilo) Ad valorem tariffs - levied as a proportion of the value of the imported good (%)

5 How Do Governments Intervene In Markets? 2. Subsidies - government payments to domestic producers Subsidies help domestic producers compete against low-cost foreign imports gain export markets Consumers typically absorb the costs of subsidies

6 How Do Governments Intervene In Markets? 3. Import Quotas - restrict the quantity of some good that may be imported into a country Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota

7 How Do Governments Intervene In Markets? 4. Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country s government e.g., Japanese auto exports to U.S. U.S. put pressure on Japan to reduce export volume of autos to the U.S. 1981

8 How Do Governments Intervene In Markets? 5. Local Content Requirements - demand that some specific fraction of a good be produced domestically (NAFTA) benefit domestic producers consumers face higher prices 6. Administrative Policies (informal barriers) bureaucratic rules designed to make it difficult for imports to enter a country polices hurt consumers by limiting choice E.g., Customs procedures hamper imports

9 How Do Governments Intervene In Markets? 7. Antidumping Policies aka countervailing duties - punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their fair market value

10 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment The most common political reason for trade restrictions Protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)

11 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment Industries are often protected because they are deemed important for national security aerospace or semiconductors

12 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment When governments take, or threaten to take, specific actions, other countries may increase trade barriers e.g., U.S. & E.U. over beef with growth hormones

13 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment Protect consumers from unsafe products e.g., FDA limit papayas from Mexico due to possible Salmonella

14 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment Preferential trade terms may be granted to countries that a government wants to build strong relations with. Also used to punish rogue states e.g., North Korea, Cuba

15 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment Protect and promote human rights through trade policy actions e.g., Grant China MFN status in 1999

16 Why Do Governments Intervene In Markets? Political Economic Jobs National Security Retaliation Consumers Foreign Policy Human Rights Environment Protect environment because international trade is associated with a decline in environmental quality Concern over global warming Enforcement of environmental regulations (ISO 14,000)

17 Why Do Governments Intervene In Markets? Political Economic Infant Industry Strategic Trade An industry should be protected until it can develop and be viable and competitive internationally Accepted as a justification for temporary trade restrictions under the WTO e.g., Brazilian auto makers

18 Why Do Governments Intervene In Markets? Political Economic Infant Industry Strategic Trade Governments can help firms from their countries attain first mover advantages Governments can help firms overcome barriers to entry into industries where foreign firms have initial advantage e.g., France: merge smaller firms into large firms

19 China & Germany How China and Germany intervene FILM (7 min) Consider while watching: How does China intervene? How does Germany intervene? Pros and Cons of approaches?

20 History of World Trading System Until the Great Depression of the 1930s, most countries had some degree of protectionism Smoot-Hawley tariff (1930) After WWII, the U.S. and other nations realized the value of freer trade established the General Agreement on Tariffs and Trade (GATT) - a multilateral agreement to liberalize trade

21 History of World Trading System In the 1980s and early 1990s protectionist trends emerged Japan s perceived protectionist (neomercantilist) policies created intense political pressures in other countries persistent trade deficits by the U.S use of non-tariff barriers increased

22 History of World Trading System The Uruguay Round of GATT negotiations began in 1986 focusing on 1. Services and intellectual property going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture 2. The World Trade Organization formed it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules

23 History of World Trading System The WTO encompassed GATT along with two sisters organizations the General Agreement on Trade in Services (GATS) working to extend free trade agreements to services the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) working to develop common international rules for intellectual property rights

24 How About Now? The WTO is effective, overall 153 members in 2011 so far, the WTO s policing and enforcement mechanisms are having a positive effect most countries adopted WTO recommendations for trade disputes 75% of disputes are settled by informal consultation Not effective regarding currency manipulation China largest currency manipulator Switzerland, Denmark, Hong Kong, Israel, and Japan

25 Future WTO Direction? The current agenda of the WTO focuses on the rise of anti-dumping policies the high level of protectionism in agriculture the lack of strong protection for intellectual property rights in many nations continued high tariffs on nonagricultural goods and services in many nations

26 Tariffs in U.S.? Go to: LINK 1. Identify two products you wish to import A. One must be Footwear B. Second is your choice 2. Select radio and click on Detail 3. Identify: A. Description B. Value of U.S. imports C. Ad valorem duty D. Specific duty E. MFN rate F. Preferential programs

27 Go to: Click International Business Resources -> Country Data (first link on page) ConsultaPedia.com (1) Click on your assigned country Mobile Friendly (2) Click on tabs for details about your country

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