Chapter 7

Chapter 7: International Trade Policy 

• How and why do governments restrict trade?

• Free trade?

  • The absence of barriers to the free flow of goods and services between countries

    • In free trade, goverenment won’t attempt to restrict what citizens buy and sell from other countries

• Restricting international free trade

  • Nations tend to intervene in trade to protect the interests of politically important groups, to promote the interests of key domestic producers, or for reasons of national security

• General Agreement on Tariffs and Trade (GATT): 

  • World trade agreement to promote international trade by reducing trade barriers

• Governments restrict or regulate trade through the 7 main instruments of trade policy:

  • Tariffs

  • Subsidies

  • Import quotas

  • Voluntary export restraints

  • Local content requirements

  • Administrative policies

  • Antidumping duties 

• Tariffs and non-tariff barriers 

  • Tariffs: A tax levied on imports that effectively raises the cost of imported products relative to domestic products. 

    • Import tariffs: taxes levied on imports.

    • Specific tariffs: levied as a fixed charge for each unit of an imported good.

    • Ad valorem tariffs: levied as a proportion of the value of an imported good.

  • Produced government revenues

    • Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods. 

    • Cause consumers to pay more for certain imports. 

  • Tariffs are generally pro-producer and anticonsumer. 

    • Import tariffs reduce the overall efficiency of the world economy.

• Instruments of trade policy  

• Export tariffs and bands:

  • Export tariff: tax placed on the export of a good. 

    • Goal is to discriminate against exporting to ensure supply.

  • Export ban: policy that partially or entirely restricts the export of a good. 

    • Ban of exports of US crude oil in 1975 to ensure sufficient supply of domestic oil at home.

• Non-tariff barriers:

  • Subsidies:

    • A government payment to a domestic producer. Subsidies help domestic producers: 

      • Compete against low-cost foreign imports. 

      • Gain export markets.

    • Consumers typically absorb the cost

  • Quotas - Import Quotas and Voluntary Export Restraints:

    • Import quota: a direct restriction on the quantity of goods imported into a country

    • Tariff rate quota: (hybrid of a quota and a tariff) a lower tariff is applied to imports within the quota than those over the quota

    • Voluntary export restraint (VER): quota on trade imposed by the exporting country, typically by the importing country’s government

    • Quota rent: extra profit producers make when supply is limited by import quota

  • Voluntary export restraints

  • Antidumping duties 

• Local content requirements (LCR): 

  • Demanding specific fraction of a good be produced domestically 

    • Can be physically or in value terms

• Administrative policies:

  • The bureaucratic rules designed to make is difficult for imports to enter country 

• Antidumping policies:

  • Dumping: selling goods in a foreign market below their cost of production or below their “fair market value”

  • Antidumping policies: punishes foreign firms that dump, thus protecting domestic producers from unfair foreign competition

• The case for government intervention:  

  • Political arguments:

    • Protecting the interests of producers within a nation (often at the expense of consumers) 

    • Achieving some political objective such as protecting the environment or human rights.

    • Political arguments for intervention

      • Protecting jobs and industries 

      • Protecting national security

      • Retaliating (using intervention as bargaining tool to force trade)

      • Furthering foreign policy objectives

      • Protecting human rights

  • Economic arguments: 

    • Boots overall wealth of nation to benefit producers and consumers

    • Infant industry argument: An industry should be protected until it can develop, and be viable and competitive internationally

      • Critcized because:

        • Useless unless it makes industry more efficient

        • If countries have the potential to develop a competitive position, its firms should raise necessary funds 

• Strategic trade policy:

  • The government can help raise national income if it can ensure firms that gain first-mover advantages in an industry are domestic

    • First-mover advantages: economic and strategic advantages that accrue to early entrants into an industry

    • Government intervention might be beneficial by helping domestic firms overcome barriers to entry that are created by foreign irms with first mover advantages

    • When the government picks and supports “winners” in important industries to give them an edge over foreign rivals

  • The Revised Case for Free Trade:

    • New trade theorists:

      • Believe government intervention is justified – classical trade theorists (Adam Smith and David Ricardo) disagree

      • Or believe while strategic trade theory is appealing, it may not work in practice

    • Retaliation and Trade War:

      • Krugman believed using strategic trade policies to establish domstic firms in a dominant position are beggar-thy-neighbor policie

        • Boosts national income at the expense of other countries 

      • Could provoke 

        • Retaliation

        • Trade wars that are worse for both countries

    • Domestic policies:

      • Governments can be influenced by special interest groups

        • Government intervention might appease some groups but won’t support country as a whole

        • Krugman sees this as another reason to not embrace strategic trade policy

• Development of the world trading system  

  • International Trading Framework:

    • Evolved since WWII to govern world trade

    • Began as the General Agreement on Tariffs and Trade (GATT)

    • Turned into the World Trade Organization (WTO)

  • Beginning of trade agreement (Smith and Great Depression):

    • The repeal of British Corn Laws was the first free trade government policy and they pushed for more trade liberalization, and by the Great Depression (1930), most countries had some degree of protectionism

    • US enacted the Smoot Hawley Act (1930): created significant import tariffs on foreign goods

      • Damaged employment abroad

  • 1947-1979: GATT, Trade Liberation, and Economic growth:

    • GATT was established

      • Multilateral agreement to liberalize trade and eliminate trade barriers

      • Very successful first rounds

    • WTO took over for GATT

  • 1980-1993: Protectionist Trends

    • Pressures for greater protectionism increased

      • Persistant trade deficits by US caused problems in some industries and political problems

    • GATT criticized 

      • Limited use of tariffs, but other intervention forms had same effect

  • The Uruguay Round and WTO:

    • Uruguay Round emphasized services, intellectual property, and agricultural subsidies

      • Dragged on for 7 years

    • WTO encompassed GATT, the General Agreement on Trade Services (GATS), and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).

• WTO in detail

  • WTO Experience to Date:

    • Members account for 98% of world trade

    • Started off strong but has fallen off since 1990s

    • Brexit and Trump administration indicated return to greater protectionism

  • WTO now acts as a global police, resolving trade disputes

  • Expanded trade agreements to cover services and intellectual property.

• WTO unresolved issues:

  • Antidumping actions.

  • Protectionism in agriculture.

  • Protection of intellectual property.

  • Market access for nonagricultural goods and services.

  • Doha Round: aims to cut tariffs, phase out agricultural subsidies, reduce barriers to investment, and limit antidumping laws.

• Sample question: 

  • Which of the following is considered a justification of trade restrictions?

    • National security 

    • Political and economic sanctions

    • The infant industry argument 

    • All of the above