International Trade: Institutional Barriers and Facilitators

1. International Trade:Institutional Barriers and Facilitators Dana-Nicoleta Lascu Chapter 3

2. Chapter Objectives • Identify different trade barriers imposed on international trade and the arguments used to erect and maintain these barriers. • Provide an overview of key international organizations facilitating international trade directly or by promoting economic development. • Identify government efforts involved in promoting economic development and trade. • Describe other trade facilitators, such as foreign trade zones, off-shore assembly plants, and special economic zones, and the Normal-Trade-Relations Status.

3. Opposing Forces • Reduction of trade barriers is a main concern of multinational firms and governments of the multinational firms. • National and local governments erect barriers to protect small and medium enterprises from multinationals.

4. Arguments for Protectionism • Protection of markets with excess productive capacity • Markets with excess productive capacity only need a fraction of the resources they allocate to production for optimal performance. • To protect state-owned enterprises, national governments limit foreign investment and entrance of foreign competing products. • Employment protection and protection of markets with excess labor • Governments erect trade barriers in markets with high levels of excess labor and underemployment to: • prevent imports • prevent efficient international companies from taking over local enterprises and firing excess workers.

5. Arguments for Protectionism (contd.) • Infant industry argument: • Allows low-income countries to protect new industries from international competitors. • Natural resources conservation and environmental protection • Environmental protection is frequently used as an argument to allow governments to impose trade restrictions aimed at conserving national natural resources.. • Consumer protection • Allows favoring local over international firms by applying rigid standards, quality controls, and product origin requirements. • National defense • Can result in banning of publications or products that attempt to destabilize the government or that bring outside influence.

6. Tools of Government Protectionism • Tariffs: Taxes imposed on goods entering a particular country to: • Discourage imports of particular goods. • Penalize countries that are not politically aligned with the importing country. • Generate revenues. • US tariffs are generally less than 10%. • Other countries can impose tariffs greater than 100% for protected products.

7. Tools of Government Protectionism, (contd.) • Non-Tariff Barriers: • Measures, other than traditional tariffs, that are used to distort international trade flows. • Raise prices of both imports and import-competing goods. • Favor domestic over foreign supply sources by causing importers to charge higher prices and to restrict import volumes.

8. Tools of Government Protectionism, (contd.) • Non-Tariff Barriers Examples: • Quotas: • Specify maximum quantity (unit limit) or value of a product that may be imported during a specified period. • Orderly market arrangements: • Intricate approach to establishing, in essence, a quota • Non-automatic import licenses: • Restrict imports of a given product or from a certain country. • Automatic import licenses • Granted freely. • Facilitate import surveillance. • Discourage import surges. • Place administrative and financial burdens on importer.

9. “Voluntary” Expansion and Restraints • Voluntary import expansion • Governments agree to allow imports from a particular country as result of pressure from that country. • Increases foreign access to a domestic market. • Increases competition and reduces local prices. • Voluntary export restraints • Self-imposed export quotas–imposed to avoid a greater penalty. • Used by the importing country to protect local industries.

10. Price Controls: Examples • Antidumping and countervailing duty actions • When used as price controls, they involve initiating investigations to determine if products were sold below fair value to either • Get rid of excess inventory (dumping). • Or as a result of foreign subsidies. • Such measures can be used to intimidate importers. • Paratariff measures: Additional charges; examples: • Advance import deposits. • Import charges. • Seasonal tariffs. • Customs charges.

11. Standards • Environmental, performance, manufacturing and other standards used as barriers to imports. • Primarily imposed by highly industrialized countries. • High standards can help local and international industry alike, by deterring gray markets.

12. Percentage Requirements • Requirement that a percentage of the products imported be locally produced. • Local content requirement • Met by manipulating and/or assembling the product on the territory of the importing country, usually in a foreign trade zone. • Favor local contribution and labor, or limit foreign ownership to a certain percentage.

13. Boycotts, Embargos, Sanctions • Boycotts • Action group calling for a ban on all goods associated with a particular company and/or country. • Target company may be representative of, or even synonymous with, its country of origin. • Embargos • Prohibiting all business deals with the target country; affects third parties. • Sanctions • Punitive trade restrictions applied by a country or group against another country for noncompliance.

14. Currency Controls • Blocked currency • Does not allow importers to exchange of local currency for currency a seller is willing to accept as payment. • Differential exchange rates • Favorable and less favorable exchange rates imposed on imports, based on the extent to which they are necessary and desirable. • Can also be the difference between black market and government exchange rates. • Foreign exchange permits • Give priority to imports in the national interest. • Delay access to hard currency exchange for products not deemed essential.

15. The International Trade Imperative • Ricardo’s theory of comparative advantage: • Countries benefit from specialization in an industry in which they have comparative advantage and from trading with one another. • Opening up the home market increases competition, thus lowering prices for local consumers. • Multinationals encourage efficiency in local manufacturing and services. • Free trade also means that firms no longer have to limit themselves to the local, national market. • Firms increase production, achieve economies of scale, and offer lower prices to world markets.

16. Trade in Goods and Gross Foreign Direct Investment World Development Indicators, World Development Report 2007, World Bank Group

17. Facilitators of International Trade • International trade and economic development organizations • Government organizations • Other institutions and procedures facilitating international trade

18. Facilitators of International Trade:World Trade Organization • Largest and most influential international trade organization. • Ensures free flow of trade. • Functions: • Provides assistance to developing and transition economies. • Offers help for export promotion. • Promotes regional trade agreements and economic cooperation. • Reviews members’ trade policies and engages in routine notification of new trade measures.

19. World Trade Organization, continued • WTO agreements represent trade rules and regulations and act as contracts guaranteeing countries trade rights and binding governments to free trade policies. • Agreements: • General Agreement on Tariffs and Trade • General Agreement on Trade in Services (GATS) • Trade-Related Aspects of Intellectual Property Rights (TRIPS)

20. Group of Eight (G8) • Members from the most industrialized countries, Canada, France, Germany, Italy, Japan, United Kingdom, United States – and Russia. • Yearly meetings involve heads of state, government ministers, directors of central banks. • Addresses: • Biotechnology. • Food safety. • Economic development. • Disarmament, arms control. • Organized crime, drug trafficking. • Terrorism. • Environmental issues. • Trade.

21. Facilitators of International Trade: International Monetary Fund (IMF) • Specialized agency of the United Nations. • Encourages unrestricted conversion of currencies through clear and unequivocal values. • Member voting power linked to amount they contribute. • Less of a lender of last resort, than a body instituting appropriate development strategies. • Mediator between debtors and creditors. • Provides training and technical assistance for monetary and financial strategies.

22. Facilitators of International Trade: The Development Banks • The World Bank • Specialized agency of the United Nations. • Largest international bank that sponsors economic development. • Employs international specialists in economics, finance, sectoral development. • Focus on health and information technology. The World Bank is headquartered in Washington, D.C.

23. Facilitators of International Trade: The Development Banks (contd.) • African Development Bank • Focused on development in Africa. • Asian Development Bank • Focused on development in Asia. • European Bank for Reconstruction and Development • Focused on rebuilding Eastern Europe. • Inter-American Development Bank • Focused on development in the Americas.

24. Facilitators of International Trade: United Nations Organizations • Promote the economic and financial welfare in low- and medium-income countries. • Focus on developing infrastructures of developing countries: • Industrial • Communication • Agricultural • Transportation • 16 different United Nations Organizations

25. Facilitators of International Trade: U.S. Government Agencies Among the U.S. government agencies promoting international trade are: • U.S. Agency for International Development (USAID). • U.S. Department of Commerce, with its International Trade Administration offices in each country of interest. • Export-Import Bank of the United States. • State and Local Government Agencies, such as the U.S. Chamber of Commerce.

26. Other Trade Facilitators: Foreign Trade Zones (FTZs) • Tax-free areas not considered part of the country for import regulations purposes. Merchandise is outside the jurisdiction of the host country’s customs services. • Firm benefits: • Foreign goods are exempt from duties if they do not enter the country. • Goods are imported when demand is high, thus deferring tariffs. • Payment is delayed until goods are sold. • Firm can use the FTZ for breaking bulk. • Host-country benefits: • Creates demand for local services, products, raw materials, and jobs. • Increases trade balance – re-exports add to total exports.

27. Other Customs-Privileged Facilities • In-bond Areas • Products are brought into an in-bond area, manipulated (processed, repackaged, assembled), and re-exported to country where products originated • Low tariffs assessed only on value-added processing that took place in the zone. • Limits on products imported to encourage re-exporting • Examples: Special economic zones (SEZs) in China and maquiladoras in Mexico are examples of customs-privileged facilities that typically exist in countries with low-cost labor.

28. Special Trade Status and Legislation • The United States offer the Permanent Normal-Trade-Relations (PNTR) Status, granting preferential tax treatment on imported products from selected countries that are not part of a trade agreement. • The Generalized System of Preferences allows 143 low-income countries to export 4,650 specified duty-free goods to the United States. • The African Growth and Opportunity Act (AGOA) focuses specifically on sub-Saharan Africa. AGOA was signed into law in 2001, and it offers incentives for African countries to open their economies and build free markets. Among others, the Act allows countries in sub-Saharan Africa to use third-country fabrics and export them duty-free to the United States.

29. Chapter Summary • Addressed rationales for protectionism – protection of markets with excess production capacity, with excess labor, infant industry argument, protection of environment, consumers, and national defense arguments. • Discussed tariff and non-tariff barriers used as protectionist tools. • Addressed several institutions that facilitate international trade directly, or by promoting economic development. They are the World Trade Organization, the Group of Eight, and the development banks; government institutions; and other entities, such as Free Trade Zones and Customs-Privileged Facilities.