Fourth Edition International Business. CHAPTER 5 The Political Economy of International Trade.

Fourth Edition

InternationalBusiness

CHAPTER 5

The Political Economy of International Trade

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-3

Chapter Focus

The political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-4

Chapter FocusThe political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups.

This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-5

Chapter Focus

The political reality of free trade is that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups.This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons.

The chapter describes the range of intervention instruments used by governments and considers the case for free trade in light of government actions.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-6

The 7 Instruments of Trade Policy

AntidumpingDuties

LocalContent

Requirements

Tariffs

VoluntaryExports

Restraints

Subsidies

AdministrativePoliciesImport

Quotas

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-7

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-8

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-9

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

Oldest form of protection.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-10

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

Oldest form of protection. Good for the Government.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-11

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

Oldest form of protection. Good for the Government. Good for producers.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-12

Tariffs: Import Taxes

Tariffs could be

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

Oldest form of protection. Good for the Government. Good for producers.

Leads to inefficiency. Bad for consumers.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-13Subsidies: Help domestic producers to compete

internationally

Government payment to a

domestic producer couldBe in the form of

Cash Grants

Tax Breaks

Low InterestLoans

GovernmentEquity

Participation

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-14

Import Quotas and Voluntary Export Restraints

Direct restrictionon the quantity of a

good that canbe imported into

a country.

Import Quotas

Quota on trade imposedby the exporting

country at the requestof the importing

country’s government.

VERs

Quotarent

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-15

Local Content Requirements

A specificfraction of a

good must be domestically

produced.

A specificfraction of a

good must be domestically

produced.

Physicalamount

Value

Widely usedby developingcountries to

develop their manufacturing

base.

Used by developedcountries to

protect local jobsand industry from

foreign competition.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-16

Administrative Policies

Bureaucratic rules designed to make it difficult for imports to enter a country.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-17

ProtectIndustryand Jobs.

Most common political argument.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-18

Retaliation

Risky strategy. If governmentfails to heed warnings and imposes its own higher tariffs, the result is higher tariffs allaround and a correspondingeconomic loss.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-19

ProtectConsumers

Battleground for biotechnology such as hormone-treatedbeef and genetically altered crops.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-20

FurtherForeign Policy

Objectives

Used to build relations withanother country or punish it(so-called rogue states). Policyis unilateral and easily defeated by other countries ignoring it.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-21

ProtectHumanRights

Basis for the use of “MostFavored Nation” status topersuade China to change itspositions on human rights.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-22

Political Arguments for Intervention

FurtherForeign Policy

Objectives

ProtectIndustryand Jobs.

NationalSecurity

Retaliation

ProtectConsumers

ProtectHumanRights

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-23

Economic Arguments for Intervention

InfantIndustry

Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton. Protect developing country’s new industry from developed countries better established industries. Recognized by GATT.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-24

Economic Arguments for Intervention

StrategicTradePolicy

Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

5-25

Economic Arguments for Intervention

InfantIndustry

StrategicTradePolicy

Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton. Protect developing country’s new industry from developed countries better established industries. Recognized by GATT. Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.