The Political Economy of International Trade: Government Interventions and Market Realities

1. International Business Fourth Edition

2. CHAPTER 5 The Political Economy of International Trade

3. Chapter Focus • The political reality offree tradeis that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups.

4. Chapter Focus • The political reality offree tradeis that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups. • This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons.

5. Chapter Focus • The political reality offree tradeis that while nations are nominally committed to it, they intervene and take actions to protect the interests of politically important groups. • This chapter explores the political and economic reasons for intervention; to restrict imports and expand exports, but, more recently, for ‘social’ reasons. • The chapter describes the range of intervention instruments used by governments and considers the case for free trade in light of government actions.

6. Subsidies Tariffs Local Content Requirements Voluntary Exports Restraints Antidumping Duties Administrative Policies Import Quotas The 7 Instruments of Trade Policy

7. Specific Fixed charge per unit Tariffs could be Tariffs: Import Taxes

8. Specific Fixed charge per unit Tariffs could be Ad Valorem Charge is a proportion of the goods value Tariffs: Import Taxes

9. Specific Fixed charge per unit Tariffs could be Ad Valorem Charge is a proportion of the goods value Oldest form of protection.  Tariffs: Import Taxes

10. Specific Fixed charge per unit Tariffs could be Ad Valorem Charge is a proportion of the goods value Oldest form of protection.  Good for the Government. Tariffs: Import Taxes

11. Specific Fixed charge per unit Tariffs could be Ad Valorem Charge is a proportion of the goods value Oldest form of protection.  Good for the Government.  Good for producers. Tariffs: Import Taxes

12. Specific Fixed charge per unit Tariffs could be Ad Valorem Charge is a proportion of the goods value Oldest form of protection.  Good for the Government.  Good for producers.  Leads to inefficiency.  Bad for consumers. Tariffs: Import Taxes

13. Tax Breaks Government payment to a domestic producer could Be in the form of Low Interest Loans Cash Grants Government Equity Participation Subsidies:Help domestic producers to compete internationally

14. Direct restriction on the quantity of a good that can be imported into a country. Import Quotas Quota on trade imposed by the exporting country at the request of the importing country’s government. VERs Quota rent Import Quotas and Voluntary Export Restraints

15. Local Content Requirements Widely used by developing countries to develop their manufacturing base. A specific fraction of a good must be domestically produced. A specific fraction of a good must be domestically produced. Used by developed countries to protect local jobs and industry from foreign competition. Physical amount Value

16. Administrative Policies • Bureaucratic rules designed to make it difficult for imports to enter a country.

17. Protect Industry and Jobs. Most common political argument.

18. Retaliation Risky strategy. If government fails to heed warnings and imposes its own higher tariffs, the result is higher tariffs all around and a corresponding economic loss.

19. Protect Consumers Battleground for biotechnology such as hormone-treated beef and genetically altered crops.

20. Further Foreign Policy Objectives Used to build relations with another country or punish it (so-called rogue states). Policy is unilateral and easily defeated by other countries ignoring it.

21. Protect Human Rights Basis for the use of “Most Favored Nation” status to persuade China to change its positions on human rights.

22. Protect Industry and Jobs. Retaliation Further Foreign Policy Objectives Protect Human Rights National Security Protect Consumers Political Arguments for Intervention

23. Infant Industry Economic Arguments for Intervention  Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton.  Protect developing country’s new industry from developed countries better established industries. Recognized by GATT.

24. Strategic Trade Policy Economic Arguments for Intervention  Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.

25. Infant Industry Strategic Trade Policy Economic Arguments for Intervention  Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton.  Protect developing country’s new industry from developed countries better established industries. Recognized by GATT.  Strategic trade policy can help a firm gain ‘first mover’ advantages or overcome barriers created by a different (foreign) first mover.