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Chapter 9 - Chapter 9 FORMULATION OF NATIONAL TRADE...

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Chapter 9: FORMULATION OF NATIONAL TRADE POLICIES Rationales for Trade Intervention Two principle issues have shaped the debate on appropriate trade polices: 1. Protecting the country’s domestic firms by taxing foreign goods r constructing barrier’s against imports 2. Directly helping domestic firms through exports subsidies, government to government negotiations, and granteed loans programs Free trade: implies that the national government exerts minimal influence on exporting and importing decisions of private firms and individuals. Fair Trade: sometimes called managed trade, suggests that national government should actively intervene to ensure that domestic firms’ exports receive equitable share of foreign markets and that imports are controlled to minimize losses of domestic jobs and market share of specific industries. Industry-Level Arguments The following are primary arguments against free trade: National Defense Argument National defense has often been used as a reason to support governmental protection of specific industries. Because world events can suddenly turn hostile to a country’s interests, the national defense argument holds that a country must be self- sufficient in critical raw materials, machinery, and technology or else be vulnerable to foreign threats Infant Industry Argument Alexandar Hamilton, the first US secretary of treasury articulated the infant industry argument in 1791. He feared that “infant” or recently developed business would not survive due to fierce competition from outside firms. He fought for the imposition of tariff on numerous imported manufactured goods to give US firms temporary protection from foreign competition until they could fully establish themselves.
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Example: Japan put tariff on fabricated copper. Maintenance of Existing Jobs To maintain existing employment levels firms and workers often petition their governments for relief from foreign competition. Assistance may come from tariff or NTBs. Strategic Trade Theory When firms and labor union official plead for government intervention to help compete internationally, their efforts are usually criticized by economists, who claim that such intervention ultimately harms the economy. The strategic trade theory was developed as a new and better model. It provides new theoretical justification for government intervention. It applied to those industries capable of supporting only a few firms worldwide. It suggests that a national government can make its country better off if it adapts trade policies that improve the competitiveness of its domestic firms in such oglopistic industries. (look at Figure 9.1 and 9.2, pg 242) In the figures we see what a government subsidy can do to make domestic firms more competitive and successful.
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