International Trade: Barriers and Facilitators

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

2. Chapter Objectives • Examine trade barriers imposed on international trade and arguments used to erect and maintain these barriers • Provide an overview of organizations facilitating international trade directly or by promoting economic development • Examine government efforts involved at promoting economic development and international trade • Describe trade facilitators such as foreign trade zones, offshore-assembly plants, special economic zones and the Most-Favored-Nation Status

3. Arguments for Protectionism • Excess productive capacity • Excess labor • Infant industry argument and industrialization • Natural resources conservation and environmental protection • Consumer protection • National defense Entry Barriers

4. Tools of Government Protectionism • Tariffs • Discourage imports of particular goods • Penalize countries that are not politically aligned with the importing country • Generate revenues • US tariffs < 10% • Other countries can impose tariffs > 100% for protected products

5. Tools of Government Protectionism, continued • 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 • Examples: • Orderly market arrangements • Voluntary import expansion • Voluntary export restraints

6. Tools of Government Protectionism, continued • Quotas • Specify maximum quantity (unit limit) or value of a product that may be imported during a specified period • Administered either on a global first-come, first-served basis or on a bilateral basis to restrict shipments from a specific supply source

7. Licenses • Non-automatic import licenses • Restrict volume and/or quantity of imports • Automatic import licenses • Granted freely to importing companies • Facilitate import surveillance • Discourage import surges • Place administrative and financial burdens on importer • May raise costs by delaying shipments

8. “Voluntary” Expansion and Restraints • Voluntary import expansion • Governments agree to allow imports from a particular country as result of pressure from another 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

9. Price Controls • Price increase • Increasing prices of imports to match minimum domestic prices • Antidumping and countervailing duty actions • When used as price controls, they involve initiating investigations to determine if products were sold below fair value to 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 that increase the cost of imports, such as advance import deposits, import charges, seasonal tariffs and customs charges

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

11. 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 • Favoring local contribution and labor • Alternatively, limiting foreign ownership to a certain percentage

12. 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

13. 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

14. Facilitators of International Trade • International Trade and Economic Development Organizations • Government Organizations • Other Institutions and Procedures Facilitating International Trade

15. 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

16. 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)

17. Group of Seven (Eight) – G7 (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 and trade

18. International Monetary Fund (IMF) • 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

19. Development Banks • The World Bank • Largest international bank that sponsors economic development • Employs international specialists in economics, finance, sectoral development • Focus on health and information technology • African Development Bank • Asian Development Bank • European Bank for Reconstruction and Development • Inter- American Development Bank

20. United Nations Organizations • Promote the economic and financial welfare of developing countries • Focus on developing industrial, communication, agricultural and transportation infrastructures • 16 different United Nations Organizations

21. Government Organizations • United States Agencies • US Agency for International Development (USAID) • US Department of Commerce • Export-Import Bank of the United States • State and Local Government Agencies

22. Free Trade Zones (FTZs) • Tax-free area not considered part of the country in terms of import regulations and restrictions–site is considered an international area • Merchandise in FTZ is outside the jurisdiction of host country’s customs services • Host country benefits: • Creates demand for local services, products, and raw materials–hence local jobs • Increases trade balance–re-exports add to total number of exports from the respective country

23. Free Trade Zones (FTZs), continued • Firm benefits from using an FTZ: • Foreign goods are exempt from duties as long as they do not enter the country • Goods are imported when demand is high, thus deferring tariffs until that time • Payment is delayed until goods are sold • Firm can use the FTZ for breaking bulk

24. Free Trade Zones (FTZs), continued • Firm benefits from using an FTZ, cont.: • Lowers prices for goods sold in the importing country • Helps importing country impose local content regulations on products from abroad • Safer than most ports of entry–bonded warehouse • Products can be labeled as manufactured in the foreign trade zone country, if products from that country have a positive country-of-origin (country image).

25. Other Privileged Trade Positions • Customs-Privileged Facilities • 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 • Most-Favored-Nation Status • Preferential tax treatment on imported products from countries that are not part of a US trade agreement

26. Chapter Summary • Rationales for protectionism include protection of markets with excess production capacity, with excess labor, infant industry argument, protection of environment, consumers, and national defense arguments • Protection tools involve imposing tariff and non-tariff barriers • Several institutions facilitate international trade directly, or by promoting economic development. They are: the World Trade Organization, the Group of Seven (Eight), and the development banks; government institutions; and other entities, such as Free Trade Zones and Customs-Privileged Facilities