international business environment - wiwi.uni-siegen.de · 06.07.2012 · import-promotion policies...
TRANSCRIPT
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INTERNATIONAL BUSINESS
ENVIRONMENT
TOPIC 3
Political Economy of International
Trade
(WHAT POLICY-MAKERS DO AND WHY THEY DO IT)
Preliminary statement
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"Perhaps, no area of economics displays such a gap between what policy makers practice and what economists preach as
does international trade.
The superiority of free trade is one of the most cherished beliefs, yet international trade is rarely free".
Dani RODRIK, Political Economy of Trade Policy (1955)
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From theory to reality
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Most nations are nominally committed to free trade
In practise, governments intervene to protect the interests of specific groups
TRADE POLICY
IMPORT …
RESTRICTIONS Promotion
EXPORT …
Promotion Restrictions
Import restriction measures
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Quantitative barriers
Tariffs (incl. anti-dumping or countervailing
duties)
Quotas
Voluntary export restraints
Domestic subsidies
Qualitative barriers
Local content requirements
Norms and standards
(technical barriers to trade)
Administrative
obstacles (e.g. non-automatic
licensing)
Exchange rate manipulation
See: http://www-personal.umich.edu/~alandear/glossary/intro.html
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Food for thought …
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Why do intergovernmental organisations like the WTO consider
that custom duties are preferable to quotas and other non-tariff barriers, especially currency manipulation
Tariffs ...
... Are transparent
... Create less distortion than quotas
... Are easier to lift than non-tariff obstacles such as norms or
standards
… Generate revenue for the government
The effects of tariffs ("small" country)
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D
S
d1
d2
q1 q2
P1 World price
P2 World Price + tariff
P* Domestic price
P
Q
E*
q*
s1
s2
c2 c1
Government revenues
Imports
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A question ...
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DA S
P1 World price
P2 World Price + tariff
P
Q
What is the differences between the curves DA and DB? What are the implications thereof for the government?
DB
d'A1 d'A2 s'A sA dA
The effects of quotas
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D
SD
q'
Pw World price
P* Domestic price
P
Q
E*
q*
Pq Dom.
Price w. quota
Import quota
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From import to export restrictions
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Usually imposed on raw materials.
Fiscal revenue Development / social policies
Environmental protection (reduce negative externalities pollution)
Conservation of natural resources (for future generations)
The actual aim is generally to improve the competitive position of domestic industries vis-à-vis their foreign competitors
Export duties Taxes and other charges Quotas and bans Minimum prices Non automatic licensing
The other side of trade policy: export promotion
Export subsidies
Cash, tax breaks, price supports (e.g. former US foreign sales
corporations)
Export financing programmes
Low-interest loans, loan guarantees (e.g. French COFACE)
Foreign trade zones
Products are subject lower customs duties and/or fewer customs
procedures (e.g. Mexican maquiladoras)
Government agencies
Trade missions for officials and businesses, export-promotion offices,
help import products the home nation does not produce
(e.g. Japanese JETRO)
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Export promotion bodies: the US case
US government export portal (http://www.export.gov): brings together resources from across the U.S. Government to assist American businesses in planning their international sales strategies
International Trade Administration (http://trade.gov/about.asp): strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements.
Export-Import Bank of the United States (http://www.exim.gov): official export credit agency of the United States. Assists in financing the export of U.S. goods and services to international markets
Overseas Private Investment Corporation (http://www.opic.gov): helps U.S. businesses invest overseas by managing risks associated with foreign direct investment
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Foreign trade zones: the maquiladoras
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Maquiladoras are Mexican assembly plants that manufacture finished goods for export to the United States. The maquiladoras are generally owned by
non-Mexican corporations. They take advantage of plentiful lower-cost Mexican labor, advantageous tariff regulations (lessened somewhat as a
result of the North American Free Trade Agreement), and close proximity to U.S. markets to produce such items as home appliances and automobiles.
from: http://www.answers.com/topic/maquiladora ; http://geo-mexico.com/?tag=urban&paged=3
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Import promotion (http://www.encyclopedia.com/doc/1G2-3045301092.html)
Import-promotion policies are measures intended to increase the volume of a country’s imports from a particular trading partner or group of trading partners.
Such policies may include bilateral agreements, bureaucratic directives, import subsidies, or procedures to improve foreign exporters’ information about domestic market opportunities
Voluntary import expansion (VIE) agreements
Preferential access to market
Import-promotion agencies
Import promotion is employed to smooth out political tensions arising from large bilateral trade imbalances (i.e. record trade surpluses of Japan and other East Asian countries during the 1980s)
More recently, advanced countries have used import promotion policies to assist potential exporters in developing and transition economies.
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Assignment: Brazilian-Chinese trade relations
1. What is the nature of the Brazilian-Chinese bilateral trade pattern? How can it be explained?
2. What are the pros and cons thereof for both partners?
3. Why is Brazil applying protectionist measures, in particular on Chinese imports? What are these measures?
4. China is also expanding its foreign direct investment in Brazil. Why? What are the consequences thereof for Brazil?
Wrap-up question: in which sense are Brazilian-Chinese bilateral economic relations a perfect illustration of free trade theories’ strong points and shortcomings?
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The case for protection
NON-ECONOMIC MOTIVES
Political issues
Strategic issues
Social issues
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Various goals can be intertwined or in conflict Goals are dynamic: objectives may change over time
ECONOMIC MOTIVES
Non-economic justifications to trade policies
Protecting consumers from "dangerous" products
Protecting jobs (i.e. in declining industries)
Protecting "sensitive" industries (deemed important for national security)
Protecting human rights in exporting countries
Retaliating to unfair foreign competition (subsidies, dumping)
Furthering the goals of foreign policy (i.e. embargo)
Addressing demands from powerful interest groups (public choice)
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Public choice: the EU-US steel dispute
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In March 2002 the US administration announced a complicated schedule of supposedly temporary high tariffs on different kinds of steel. Something like $8
billion of imports from Europe, Japan, South Korea and other countries were affected, about 10% of the world market.
The White House said that these duties of up to 30% on imported steel were designed to give the struggling US steel industry a three-year respite from
international competition so that it could restructure.
Yet, political factors certainly came into play in this decision: the US president, George Bush, needed political support from key states such as Pennsylvania, West
Virginia and Ohio, all of which produce steel, in advance of the mid-term elections.
The EU, Japan, Brazil, South Korea, Norway, New Zealand and Switzerland responded by lodging a complaint with the World Trade Organisation. The WTO concluded that the tariffs violated international trade rules allowing countries to
protect themselves against sudden surges of imports.
In December 2003, the US administration eventually decided to lift these tariffs
Sources: The Economist, The Guardian, The New York Times
Economic motives (1): industry level
Promoting foreign direct investment / technology transfers
Protecting infant industries (dynamic theory of comparative advantage) (http://internationalecon.com/Trade/Tch100/T100-4.php)
Supporting the development of strategic industries and technologies (strategic trade policy)
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Protecting infant industries: the US case
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Alexander Hamilton (January 11, 1755 – July 12, 1804)
Thomas Jefferson (April 13, 1743 – July 4, 1826)
New trade theory and strategic trade policy (STP)
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Advantage to first mover
Oligopolistic markets
Barriers to entry
Capital intensive industries
Government's strategic trade policy
Trade promotion (domestic firms)
Trade restriction (foreign firms)
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Modelling STPs: the game theory
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No subsidies
Airbus
Enters Does not enter
Boeing Enters -5 / -5 10 / 0
Does not enter 0 / 10 0 / 0
Subsidies (+10 to Airbus)
Airbus
Enters Does not enter
Boeing Enters -5 / 5 10 / 0
Does not enter 0 / 20 0 / 0
Economic motives (2): national level
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The "large country" argument
An increase in tariffs at home will drive world
prices to fall
Economic development
Export promotion
Import substitution
The "national self-interest" argument
International trade and the prisoner's dilemma
Revenues for the government
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The effects of tariffs ("large" country)
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D
S
d2
q1 q2
PW
P'W +
tariff
P* Domestic price
P
Q
E*
q*
s2
c2 c1
P'w
National self-interest and the prisoner's dilemma
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GAINS FROM TRADE
COUNTRY A
FREE-TRADE PROTECTION
COUNTRY B
FREE-TRADE 800 / 800 300 / 900
PROTECTION 900 / 300 500 / 500
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Assignment: managerial implications
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Generally speaking, trade barriers raise export costs and act as a constraint on firms' strategies
International firms have an incentive to lobby for free trade
Protectionism hazards (Paul Krugman)
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Public choice
Strategic trade policies are likely to be captured by private interest groups who will distort it to their own ends
Negative impact on domestic economy
Rent-seeking behaviour leading to higher prices for consumers, less incentive to quality and innovation
Non-cooperative behaviour
Strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbour
policies that boost national income at the expense of other countries
Retaliation and trade wars
Countries that enforce protectionist measures will probably provoke retaliation. Cross-retaliation may in turns lead to a trade war