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The Political Economy of International Trade Chapter 6

The Political Economy of International Trade Chapter 6. Why Do Governments Intervene in International Trade?. To some extent, every country intervenes in the flow of goods and services across its borders Enhancing Employment: Imports compete with local firms Retaliation:

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The Political Economy of International Trade Chapter 6

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  1. The Political Economy of International TradeChapter 6

  2. Why Do Governments Intervene in International Trade? To some extent, every country intervenes in the flow of goods and services across its borders • Enhancing Employment: • Imports compete with local firms • Retaliation: • Comparable or fair access to other country’s market • Price Control Objectives: • Dumping restrictions

  3. Reasons for Intervention in International Trade • Industrialization argument: • Agrarian economies need protection to industrialize (faster growth, more value-added) • Essential Industry argument: • Protecting important national industries • Infant-industry argument: • Need to protect industry for a period of time until it becomes more competitive over time • Political objectives: • Economic relationships with other countries (friendly or unfriendly)

  4. Reasons for Intervention in International Trade • Promoting Investment Inflows • If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area • Balance-of-Payments related objectives: • Import Substitution: policies emphasizing products to sell domestically • Export Promotion: policies emphasizing products to export

  5. Forms of Trade Control • Different instruments to control trade • Quantity of goods (non-tariff barriers) • Price of goods (tariffs) • Tariffs (duties) may be levied • On goods entering, leaving, or passing through a country • For protection or revenue • On a per unit or a value basis (ad valorem) • Many more types of non-tariff barriers than types of tariffs

  6. Forms of Trade Control • Non-tariff barriers • import quotas to limit amount, VERs • embargo: to eliminate export of item • subsidies or assistance to local firms • customs delays • paperwork or red tape • Imposition of “higher” standards • “Buy Local” laws in favor of domestically produced goods, local content laws • Reciprocal requirements for trade

  7. The World Trading System • GATT was the world’s major trade-liberalization organization after WWII • Multilateral negotiations with 120 countries • Eight rounds of negotiations • Monitored enforcement • Most-Favored-Nation Clause (MFN): if a tariff reduction granted to one MFN country, must be granted to all other MFN countries • Most countries still made exceptions to MFN, due to trade alliances or other reasons

  8. From GATT to WTO WTO created by the Uruguay Round 1986-1993, taking effect in 1995 • Trade in services, not just goods • Telecommunications and financial services • Intellectual property rights • Better settlement of disputes • Reduced agricultural subsidies, textiles protection • Criticisms: Labor, the environment, national sovereignty

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