©2004 Prentice Hall9-1 Chapter 9: Formulation of National Trade Policies International Business, 4 th Edition Griffin & Pustay.

©2004 Prentice Hall9-1

Chapter 9:Formulation of National Trade Policies

International Business, 4th Edition

Griffin & Pustay

©2004 Prentice Hall9-2

Issues on Trade Intervention

Should a national government intervene to protect the country’s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?

Should a national government directly help the country’s domestic firms increase their foreign sales through export subsidies, government-to-government negotiations, and guaranteed loan programs?

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Free Trade or Fair Trade?

Free trade –minimal influence from government

Fair trade – active intervention from government (managed trade)

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Industry-Level Arguments

National Defense Argument Infant Industry Argument Maintenance of Existing Jobs Strategic Trade Theory

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National Defense Argument

Country must be self-sufficient in critical raw materials, machinery, and technology or else be vulnerable to foreign threats

Appeals to general public Protects steel, electronics, and machine

tools industries, and merchant marines

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Infant Industry Argument

Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established

Powerful economic development strategy

Which industries should be protected? For how long?

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Maintenance of Existing Jobs

Jobs in high-wage countries threatened by imports from low-wage countries

Forms of assistance– Tariffs

– Quotas

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Strategic Trade Theory

National government can make its country better off if it adopts trade

policies that improve the competitiveness of its domestic firms

in oligopolistic industries

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National Trade Policies

Economic Development Programs– Export promotion strategy– Import substitution strategy

Industrial Policy– Key domestic industries chosen, protected, and

promoted Public Choice Analysis

– Consumers versus special interest groups

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Barriers to International Trade

Tariff barriers– Export tariff– Transit tariff– Import tariffs

• Ad valorem• Specific• Compound

Non-tariff barriers– Quotas– Numerical export controls– Product and testing standards– Restricted access to distribution

networks– Public-sector procurement

policies– Regulatory controls– Currency controls– Investment controls– Local-purchase requirements

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Exports of Canadian softwood

lumber to the U.S. have

resulted in a 30-year long trade dispute

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Figure 9.6 Types of Barriers to International Trade

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Promotion of International Trade

Subsidies Foreign Trade Zones (FTZ) Export Financing Programs

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Controlling Unfair Trade Practices

International Trade Administration (ITA)– Division of U.S. Department of Commerce– Determines whether an unfair trade practice has

occurred– Confirmed cases transferred to U.S.

International Trade Commission (ITC) Two types of unfair trade practices

– Government subsidies– Unfair pricing practices

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Controlling Unfair Trade Practices

Countervailing Duties (CVD) Antidumping Regulations Super 301

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Objectives of Unfair Trade Practice Laws

Promote global efficiency by encouraging production in those countries that can produce a good most efficiently

Ensure that trade occurs on the basis of comparative advantage, not the size of government subsidies

Protect consumers from predatory behavior