Trade Global and Investment Environment
Five
Chapter
The Political Economy of International Trade
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-1
Governments and Trade
trade: a government does not restrict what its citizens can buy from or sell to another country Ricardo, Heckscher-Ohlin: free trade enhances economy level domestic consumption; more efficient use of resources of domestic growth and wealth
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Free
Smith,
Higher
Stimulation
creation
Irwin/McGrawHill
Slide 5-2
Governments and Trade
More
often governments manage trade (... level the "playing-field")
Restriction of imports: protectionist intervention Promotion of exports Trade promotion and FDI incentives
Free-trade
"Good" or "Bad"?
Social issues related to free-trade Implications for business and individual groups
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-3
Instruments of Trade Policy
Tariffs Subsidies Import
quotas Voluntary export restraints Local content requirements Anti-dumping policies Administrative policies
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-4
Taxes
levied on imports (also sometimes on exports)
Tariffs
Specific tariff: fixed charge for each good imported Ad valorem tariff: a % of imported goods value
Who
gains:
Government Domestic producers (at least in the short run) Employees of protected industries keep their jobs
Who
loses:
Consumers who pay higher prices The economy which remains inefficient Employees of protected industries who don't develop new skills
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-5
Subsidies
payments to domestic producers
Government
Cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders
Subsidies
are aimed at lower costs to help
Compete against cheaper imports Gain export markets Increase domestic employment Local producers achieve first-mover advantage in emerging industries
Governments
tax individuals... to pay for subsidies Consumers buy more expensive goods with lower disposable incomes
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-6
Import
Quotas and Voluntary Export Restraints
Import quota: government specifies how much of what product can be imported from which countries Voluntary export restraint: a quota imposed by the exporting country officially or unofficially
Local
Content Requirements
Some % of a good has to be produced domestically with local raw materials and local labor Used by LDCs to
Achieve
technology transfer, skills transfer Shift manufacturing base to a higher technological level
Similar effects to those of import quotas
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Irwin/McGrawHill
Slide 5-7
Anti-dumping
Dumping:
At
Policies
selling goods in an overseas market
below their production costs or Below "fair market value"
Anti-dumping
policies punish producers who dump and protect domestic producers
Administrative
Bureaucratic
policies
rules make that it difficult for imports to enter a country
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-8
Political Arguments for Intervention
National
security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives
Economic Arguments for Intervention Infant industry protection Strategic trade policy
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-9
International Trade Cooperation (!)
U.S.A.
and:
foreign companies trading with Cuba any company dealing with Iran-Iraq
W.T.O.
in place but...
disputes with China dealt on bilateral basis (not a member) disputes with Japan dealt on bilateral basis (a member) trade blocks proliferating (EU, NAFTA, ASEAN)
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-10
The Global Trading System
Smith
to Great Depression
Britain adopts free trade in 1846 Smoot-Hawley act (US) 1930 aimed at employment protection (caused by the Great Depression)
1947-1979:
GATT, Trade Liberalization, Economic Growth 1980-1993: GATT needs fixing
Uruguay round of GATT negotiations (1986-1993) Creation of WTO with powers to implement trade agreements
Irwin/McGrawHill
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-11
GATT
Pre-WWII
protectionism
Smoot-Hawley +57% import tariffs (1930) UK, France, Italy followed suit world depression in `30s
Havana
Conference (1947) -> GATT
125 countries by 1994 small staff in Geneva tariffs fm 40% in `47 to 3% in `95 trade 15x to $6.75 trillion in `92
WTO
Irwin/McGrawHill
superceded GATT in 1995
Copyright 2001 The McGrawHill Companies, Inc. All rights reserved.
Slide 5-13
Uruguay Round of GATT negotiations
Tariffs
cut further Agricultural Policy Modified:
cut price supports 20%, export subsidies 36% For this policy: ...