lecture 4 the political economy of international business edited

8/13/2019 Lecture 4 the Political Economy of International Business Edited

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Chapter 6

The Political Economy ofInternational Trade


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Introduction

Free tradeoccurs when governments do not attempt torestrict what its citizens can buy from another country orwhat they can sell to another country

While many nations are nominally committed to freetrade, they tend to intervene in international trade to protectthe interests of politically important groups


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Instruments Of Trade Policy

The main instruments of trade policy are(Trade barriers):

Tariffs

Subsidies

Import QuotasVoluntary Export Restraints

Local Content Requirements

Administrative Policies

Antidumping Policies


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Tariffs

Tariffsare taxes levied on imports that effectively raise the cost ofimported products relative to domestic products

Specific tariffsare levied as a fixed charge for each unit of a goodimported ($3 per barrels of oil)

Ad valorem tariffsare levied as a proportion of the value of theimported good (EU tariff on Banana import from Latin America, 15 to20 % for the first 2.5 million tons)

Tariffs increase government revenues, provide protection to domesticproducers against foreign competitors by increasing the cost of

imported foreign goods, and force consumers to pay more for certainimports

So, tariffs are unambiguously pro-producer and anti-consumer, andtariffs reduce the overall efficiency of the world economy


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Subsidies

Subsidies are government payments to domesticproducers

Consumers typically absorb the costs of subsidies

Subsidies help domestic producers in two ways:

they help them compete against low-cost foreign imports

they help them gain export markets


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Import Quotas And VoluntaryExport Restraints

Import quotasdirectly restrict the quantity of some good that may beimported into a country (US allows only certain firms to import cheese)

Tariff rate quotasare a hybrid of a quota and a tariff where a lowertariff is applied to imports within the quota than to those over the quota

Voluntary export restraintsare quotas on trade imposed by theexporting country, typically at the request of the importing countrys

government (Japanese exports of automobiles to the US in 1981 to1.68 million.).Countries agree due to avoid more damaging actions.

A quota rentis the extra profit that producers make when supply is

artificially limited by an import quota (the Japanese gained $1 billionper year from 1981 to 1985)

Import quotas and voluntary export restraints benefit domesticproducers by limiting import competition, but they raise the prices ofimported goods


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Local Content Requirements

A local content requirementdemands that some specificfraction of a good be produced domestically

Local content requirements benefit domestic producers,but consumers face higher prices.(India enforces this oncement import from Bangladesh)


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Administrative Policies

Administrative trade policesare bureaucratic rules thatare designed to make it difficult for imports to enter acountry

These polices hurt consumers by denying access topossibly superior foreign products

Netherlands export of tulip bulbs to Japan suffered as

they were all checked.

France required all imported video tape recorders enterthough a single small entry point which was poorly staffed.


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Antidumping Policies

Dumping refers to selling goods in a foreign market below their costsof production, or selling goods in a foreign market below their fair

market value (the US accused EU of dumping Steel)

Dumping enables firms to unload excess production in foreign

marketsSome dumping may be predatory behavior, with producers usingsubstantial profits from their home markets to subsidize prices in aforeign market with a view to driving indigenous competitors out of thatmarket, and later raising prices and earning substantial profits

Antidumping polices(or countervailing duties) are designed to punishforeign firms that engage in dumping and protect domestic producers

from unfair foreign competition. The US imposed 9% and 4% tariffs on

two Korean semi conductor exporters.


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The Case For Government Intervention

Arguments for government intervention:

Political argumentsare concerned with protecting theinterests of certain groups within a nation (normallyproducers), often at the expense of other groups (normallyconsumers)

Economic argumentsare typically concerned withboosting the overall wealth of a nation (to the benefit of all,both producers and consumers)

P liti l A t f G t


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Political Arguments for GovtIntervention

Political arguments for government intervention include:

protecting jobs

protecting industries deemed important for national

securityretaliating to unfair foreign competition

protecting consumers from dangerous products

furthering the goals of foreign policy

protecting the human rights of individuals in exportingcountries


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Protecting Jobs And Industries

Protecting jobs and industries is the most commonpolitical reason for trade restrictions : Japan imposedImport quotas on Rice to protect jobs in the agriculturalsector.

Usually this results from political pressures by unions orindustries that are "threatened" by more efficient foreignproducers, and have more political clout than the

consumers that will eventually pay the costs .

(The EU applied CAP or Common Agricultural Policy toprotect the politically powerful farmers.)


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National Security

Industries such as aerospace or electronics are oftenprotected because they are deemed important for nationalsecurity.

In 1986 , the US semiconductor manufacturingconsortium of 14 companies , SEMATECH, convinced thegovernment that their product was vital to defenseindustries and so the US could not rely on foreign suppliesfor these. As a result the government provided $100 million

per year as subsidies. It was withdrawn in 1996 only afterthe rise in demand for personal computers and Intelprocessors.


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Retaliation

When governments take, or threaten to take, specificactions, other countries may remove trade barriers. The USthreatens China to face trade sanctions unless they imposeIntellectual Property Laws. This caused the US millions of

dollars due to piracy. After threats to impose 100% tariff oncertain Chinese imports , China agreed to tighten itsimplementation of Intellectual property laws.

If threatened governments dont back down, tensions canescalate and new trade barriers may be enacted.


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Protecting Consumers

Governments may intervene in markets to protectconsumers.

The US banned import of 58 types of assault weapons toavoid incidents of shooting in 1998 after such an incidenttook place in Arkansas, home state of the then presidentBill Clinton, that killed four children and a school teacher.

Austria and Luxembourg banned import of Geneticallymodified cotton seeds by Monsanto as they can cause

genetic pollution.


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Furthering Policy Objectives

Foreign policy objectives can be supported through tradepolicy

Preferential trade terms can be granted to countries thata government wants to build strong relations with.(USrelations with Israel)

Trade policy can also be used to punish rogue states thatdo not abide by international laws or norms.(US sanctionsagainst Iran)

However, it might cause other countries to undermineunilateral trade sanctions

The Helms-Burton Actand the DAmato Act, have beenpassed to protect American companies from such actions

E i A t


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Economic ArgumentsFor Intervention

Economic arguments for intervention include:

the infant industry argument

strategic trade policy


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The Infant Industry Argument

The infant industry argumentsuggests that an industryshould be protected until it can develop and be viable andcompetitive internationally

The infant industry argument has been accepted as ajustification for temporary trade restrictions under the WTO

However, it can be difficult to gauge when an industryhas grown up

Critics argue that if a country has the potential to developa viable competitive position its firms should be capable ofraising necessary funds without additional support from thegovernment


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The Infant Industry Argument

Brazil had the 10thlargest auto industry in the world withprotection for 30 years. But after the protection wasremoved in the 1980s it turned out to be one of the mostinefficient in the world.

But TATA is an example of government protection beingfruitful.


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Strategic Trade Policy

Strategic trade policysuggests that in cases where there

may be important first mover advantages, governments canhelp firms from their countries attain these advantages.(US govt. gave substantial R & D grants to Boeing whichbuilt the 707 passenger jet following a military plane)

Strategic trade policy also suggests that governmentscan help firms overcome barriers to entry into industrieswhere foreign firms have an initial advantage. (The

Japanese government provided research support in the70s an early 80s to LCD manufacturers who ultimately beatthe Americans who entered the market first.)

lecture 4 the political economy of international business edited

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