Lecture 6notes - Lecture 6 The Political Economy of...

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1 Lecture 6 The Political Economy of International Trade
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2 Outline A. Introduction B. Instruments of Trade Policy C. Political Arguments for Intervention D. Economic Arguments for Intervention E. Managerial Implications
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3 A. Introduction Governments manage trade through several methods such as: the protectionist intervention to restrict imports promotion of exports foreign direct investment (FDI) incentives Whether free-trade is “Good” or “Bad”? Examine the implications for business and individual groups
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4 B. Instruments of Trade Policy There are many instruments of trade policy including: Tariffs Subsidies Quotas Voluntary export restraints Local content requirements Administrative policies Anti-dumping policies
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5 Tariffs Specific tariff A fixed charge for each unit of a good imported Ad valorem tariff A proportion of the value of the imported good Generates revenue for government Protects domestic producers ( ↑ the cost of foreign goods) Reduces efficiency Bad for consumers ( ↑ the price of the goods) E.g. 8-10% tariff imposed by the US government on the imports of  steel (stared in 2002, ended in 2003). Affected parties: steel industry, steel-consuming industry, final consumers. (Global business Today: P.194)
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6 Subsidies Subsidy is the government payment to a domestic producer Example: cash grants, low-interest loans, tax breaks and government equity participation in the company Advantages Disadvantages Helps domestic producers against low-cost foreign imports May not be successful in increasing domestic producers’ international competitiveness Gains export market for domestic producers May encourage over-production and inefficiency for domestic producers E.g., :Japanese farmers were selling wheat at a market price of $9/bushel,  while receiving a subsidy of $35/bushel (Global Business Today p.196).
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7 Quotas Import quota Restriction on the quantity of goods imported into a country Voluntary export restraint (VER) Quota on trade imposed by exporting country, typically at the request of the importing country Example: The limitation on auto exports to US enforced by Japanese automobile producers in 1981 ( limited Japanese imports to no more than 1.68 million vehicles per year. The agreement was revised in 1984 to allow 1.85 million Japanese vehicles per year.) Limits import competition   The domestic price of an imported good ↑ ( limited foreign supply)
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Lecture 6notes - Lecture 6 The Political Economy of...

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