INTERNATIONALBUSINESS

Ch.6ThePoliticalEconomyofInternationalTradeInstrumentsofTradePolicy:TariffsTariffsaretheoldestformoftradepolicy;theyfallintotwocategoriesSpecifictariffsareleviedasafixedchargeforeachunitAdvaloremtariffsareleviedasaproportionofthevalueoftheimportedgoodTariffsaregoodforgovernmentbecausetheygeneraterevenueTariffsprotectdomesticproducersbuttheyreduceefficiencyTariffsarebadforconsumersbecausetheyincreasethecostofgoodsTwoconclusion:Tariffsareunambiguouslypro-producerandanti-consumer.(increasedomesticprice)Reduceoverallefficiencyoftheworldeconomy.Aprotectivetariffencouragesdomesticfirmstoproduceproductsathomeanditcouldbeproducedmoreefficientlyabroad–aninefficientutilizationofresources.InstrumentsofTradePolicy:SubsidiesGovernmentpaymenttoadomesticproducerCashgrantsLow-interestloansTaxbreaksGovernmentequityparticipationinthecompanyIthelpsdomesticproducerintwowaysCompetingagainstforeignimportsGainingexportmarketsSubsidyrevenuesaregeneratedfromtaxesSubsidiesencourageover-production,inefficiencyandreducedtradeMostofthesubsidiesaregranttotheagriculturalproducts(e.g.US;EUcountries,S.Korea)InstrumentsofTradePolicy:QuotasImportquotaRestrictiononthequantityofsomegoodimportedintoacountryTariffratequota:acommonhybridofaquotaandatariff.InstrumentsofTradePolicy:QuotasVoluntaryexportrestraint(VER)Quotaontradeimposedbyexportingcountry,typicallyattherequestoftheimportingcountryForeigncountriesagreetoVERsbecausetheyfearmoredamagingpunitivetariffsorimportquotasmightfollow(e.g.Chinaintheopeningcase)TheextraprofitthatproducersmakewhensupplyisartificiallylimitedbyanimportquotaisquotarentInstrumentsofTradePolicy:LocalContentRequirement(LCR)AlocalcontentrequirementrequiressomespecificfractionofagoodtobeproduceddomesticallyAcertainpercentageofcomponentpartsAcertainpercentageofthevalueofthegoodInitiallyusedbydevelopingcountriestohelpshiftfromassemblytoproductionofgoods.Developedcountries(US)beginningtoimplementForcomponentpartsmanufacturer,LCRactsthesameasanimportquotaBenefitsproducers,notconsumersInstrumentsofTradePolicy:

AdministrativePoliciesBureaucraticrulesdesignedtomakeitdifficultforimportstoenteracountryJapanese‘masters’inimposingrulesTulipbulbsFederalExpressFrance–videotapesAntidumpingPoliciesDefinedasSellinggoodsinaforeignmarketbelowproductioncostsSellinggoodsinaforeignmarketbelowfairmarketvalueResultofUnloadingexcessproductionPredatorybehaviorRemedy:seekimpositionoftariffsTheCaseforGovernmentInterventionGovernmentinterventionfor2paths:politicalandeconomicPolitical:protectingtheinterestsofcertaingroupswithinanation(producers),oftenattheexpenseofothergroup(consumers)Economic:boostingtheoverallwealthofanation(benefitbothproducer&consumer)PoliticalArgumentsforInterventionProtectingjobsandindustriesCommonAgriculturalPolicy(CAP)inEuropeprotectjobsofEurope’spoliticallypowerfulfarmersbyrestrictingimportsandguaranteeingpricesandVERNationalsecurityProtectcertainindustryfornationalsecurity:defenseindustries(e.g.semiconductors,aerospace)RetaliationBargainingtooltohelpopenforeignmarketsandforcetradingpartnersto“playbytherulesofthegame”ProtectingconsumersGeneticallyengineeredseedsandcropsHormonetreatedbeefFurtheringforeignpolicyobjectivesGovernmentsometimesusetradepolicytosupporttheirforeignpolicyobjectiveinordertobuildstringrelationswithothersProtectinghumanrightsAsatooltonegotiatewithforeigncountriesinthehopeofimprovingothers’humanrightsEconomicArgumentsforInterventionInfantindustryOldestargument-AlexanderHamiltonsupporteditin1792ProtectedundertheWTOOnlygoodifitmakestheindustryefficientBrazilauto-makers-10thlargest-wiltedwhenprotectioneliminatedRequiresgovernmentfinancialassistanceTodayiftheindustryisagoodinvestment,globalcapitalmarketswouldinvestStrategictradepolicyGovernmentshouldusesubsidiestoprotectpromisingfirmsinnewlyemergingindustrieswithsubstantialscaleeconomiesGovernmentsbenefit(theymightgetpay)iftheysupportdomesticfirmstoovercomebarrierstoentrycreatedbyexistingforeignfirmsDevelopmentoftheWorldTradingSystem

FromSmithtotheGreatDepressionIntellectualargumentsforfreetradeAdamSmith

andDavidRicardoFreetradeasgovernmentpolicyBritain’s(1846)repealoftheCornLawsBritaincontinuedfreetradepolicyFearoftradewarGreatDepressionUSstockmarketcollapseSmoot-Hawleytariff(1930)Almosteveryindustryhadits“madetoordertariff”ForeignresponsewastoimposeownbarriersUSexportstumbledandtheworldslidfurtherintotheGreatDepressionGATT&DisturbingTrendsinthe

WorldTradingSystemUsed‘roundsoftalks’tograduallyreducetradebarriersUruguayRoundGATT1986-93MutualtariffreductionsnegotiatedDisputeresolutiononlyifcomplaintswerereceivedPressureforgreaterprotectionismduetoIncreaseinthepowerofJapan’seconomicmachineandclosedJapanesemarketsUStradedeficitGATTcircumventedbymanycountries,countriesmembersgetaroundGATTregulation.Nocomplaintsbetweencountries,peopleuseVERinsteadofimposingtariff.UsingVERs(nontariffbarrier)makethethingsworseGATTCriticismsEconomictheoriesdon’tfitthe‘realworld’modelUSglobalpreeminencehasdeclinedShiftfromcuttingtariffstoeliminatingnon-tariffbarriersangeredcountries‘NationalTreatment’or‘MostFavoredNation’statusresultsininequalities

TheWorldTradeOrganizationTheWTOwascreatedduringtheUruguayRoundofGATTtopoliceandenforceGATTrulesMostcomprehensivetradeagreementinhistoryFormationofWTOhadanimpactonAgriculturesubsidies(stumblingblock:US/EU)AppliedGATTrulestoservicesandintellectualproperty(TRIPS)StrengthenedGATTmonitoringandenforcementTheWTO148membersin2005Represents90%ofworldtrade9of10disputessatisfactorilysettledTariffreductionfrom40%to5%Tradevolumeofmanufacturedgoodshasincreased20timesTheWTOPolicingorganizationfor:GATTServicesIntellectualpropertyResponsibilityfortradearbitration:ReportsadoptedunlessspecificallyrejectedAfterappeal,failuretocomplycanresultincompensationtoinjuredcountryortradesanctions325disputesbroughttoWTObetween1995and2005196handledbyGATTduri