In-Depth Notes on Government Policy and International Trade

Learning Objectives

• Identify the policy instruments used by governments to influence international trade flows.
• Understand the reasons behind government intervention in international trade.
• Summarize and explain arguments against strategic trade policy.
• Describe the development of the world trading system and current trade issues.
• Explain implications of developments in the world trading system for managers.

Instruments of Trade Policy

Key Instruments

• Tariffs: Taxes on imports to raise prices of foreign goods.
• Subsidies: Government payments to domestic producers to lower their production costs.
• Import Quotas: Restrictions on the quantity of a good that can be imported.
• Voluntary Export Restraints: Self-imposed limits on the quantity of exports by a country.
• Local Content Requirements: Specifies that a certain fraction of a product must be made domestically.
• Administrative Policies: Bureaucratic regulations that make it difficult for imports to enter.
• Anti-dumping Duties: Tariffs imposed on foreign imports deemed to be priced below fair market value.

Tariffs

• Ad valorem tariffs: A percentage of the value of imported goods.
• Specific tariffs: A fixed charge for each unit imported (e.g., $3 per barrel of oil).

Subsidies

• Definition: Government payments to domestic producers that can take various forms (cash grants, loans, tax breaks).
• Benefits:
  • Lower the production costs for domestic firms.
  • Help domestic producers compete against foreign imports and expand into export markets.

Import Quotas and Voluntary Export Restraints

• Import Quotas: Direct limits on the quantity of goods that can be imported.
• Ver: An agreement between exporting and importing countries regarding export limitations (e.g., auto exports from Brazil to Mexico).

Export Tariffs and Bans

• Export Tariff: Tax on certain goods exported to regulate supply domestically.
• Export Ban: Complete or partial restriction on the export of goods (e.g., U.S. crude oil ban in 1975).

Local Content Requirements

• Definition: Regulations requiring a specific fraction of a good to be produced domestically.
• Example: Buy America Act requiring 51% of materials in U.S. government contracts to be from American sources.

Administrative Policies

• Bureaucratic rules that hinder imports. Notable example: Japan's trade practices that impede foreign companies' access to its market.

Anti-dumping Policies

• Definition: A regulatory response to foreign companies selling below their cost or fair market value.
• Process: Domestic producers can file complaints to government bodies like the CBSA in Canada if they suspected dumping.

Political Arguments for Intervention

1. Protecting domestic jobs and industries from foreign competition.
2. National security concerns regarding strategic industries.
3. Retaliatory measures against unfair trade practices.
4. Consumer protection from unsafe foreign products.
5. Furthering foreign policy goals through trade agreements.
6. Enhancing human rights in trading partner countries.

Economic Arguments for Intervention

Infant Industry Argument

• Suggests that new industries need protection from established foreign industries until they become competitive.
• Critique: Potential for government inefficiency and capital market access challenges.

Strategic Trade Policy

• Argues for government intervention to elevate national income by protecting home markets and supporting first-mover advantages in industries.
• Examples: Support for Airbus, Bombardier, and Boeing to foster competitiveness.

Revised Case for Free Trade

• Criticism of strategic trade policies as impractical, with governments often acting in the interest of politically influential groups (e.g., CAP in the EU).

Development of the World Trade System

1. GATT Era (1947-1979): Focus on trade liberalization and economic growth.
2. Protectionism Trends (1980-1993): Shift towards more protective measures.
3. WTO Formation (1986-1995): Establishing a framework for international trade and addressing trade disputes.

The World Trade Organization (WTO)

• Functions as an umbrella organization overseeing various trade agreements, including GATT, GATs, and TRIPs.
• Tasked with resolving trade disputes and monitoring member countries' trade policies.

Implications for Business

• Trade barriers impact firm strategy and can alter competitive dynamics.
• Significant effects from trade policy changes, especially evident during global crises like pandemics.