Irwin/McGraw-Hill Copyright 2001 The McGraw-Hill Companies, Inc. All rights reserved.

FiveC h a p t e r

The Political Economy of International Trade

Global T

rade and Investment E

nvironment

Irwin/McGraw-Hill Copyright 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Governments and TradeFree trade: a government does not restrict what its

citizens can buy 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

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Governments and Trade

More often governments manage trade (… level the “playing-field”) Restriction of imports: protectionist intervention Promotion of exports Trade promotion and FDI incentives

Free-trade “Good” or “Bad”? Social issues related to free-trade Implications for business and individual groups

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Instruments of Trade Policy

TariffsSubsidiesImport quotasVoluntary export restraintsLocal content requirementsAnti-dumping policiesAdministrative policies

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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

TariffsSlide 5-4

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SubsidiesGovernment 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

industriesGovernments tax individuals… to pay for subsidiesConsumers buy more expensive goods with lower

disposable incomes

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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 unofficiallyLocal 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

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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

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Political Arguments for InterventionNational securityIndividual industries and jobs

protectedRetaliationConsumer protection (health, safety)Furthering foreign policy objectives

Economic Arguments for Intervention

Infant industry protectionStrategic trade policy

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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 (not a

member) disputes with Japan dealt on bilateral basis (a

member) trade blocks proliferating (EU, NAFTA, ASEAN)

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The Global Trading SystemSmith to Great Depression

Britain adopts free trade in 1846 Smoot-Hawley act (US) 1930 aimed at employment

protection (caused by the Great Depression)1947-1979: GATT, Trade Liberalization,

Economic Growth1980-1993: GATT needs fixing

Uruguay round of GATT negotiations (1986-1993) Creation of WTO with powers to implement trade

agreements

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GATTPre-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

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Uruguay Round of GATT negotiationsTariffs cut furtherAgricultural 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 principlesIntellectual Property Rights protected further:

patents, copyrights, trademarks, brand namesWTO created: to implement Uruguay round,

controversial

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WTO: Early ExperienceWTO 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!

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The WTO

145 members in 2003Represents 90% of world trade9 of 10 disputes satisfactorily settledTariff reduction from 40% to 5%Trade volume of manufactured goods has increased

20 times

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“So what” for Business”

Trade barriers affect firm strategy

Government policy has direct impact on firm business

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