2. Management 2203, Ch 7

Chapter 7: Government Policy and International Trade

Learning Objectives

• Understand the policy used by governments to influence international trade flows.

• Explore reasons why governments intervene in international trade.

• Analyze arguments against strategic trade policy.

• Discuss the world trading system and current trade issues.

• Review developments in the world trading system.

Introduction to Trade Policies

• Free Trade: A situation in which the government does not impose restrictions on what citizens buy or sell from/to other countries.

• Intervention: Nations may intervene in international trade to protect the interests of politically important groups, like US farmers.

Instruments of Trade Policy

• There are seven main instruments of trade policy, often classified as tariff and non-tariff barriers (NTBs):

  • Tariffs: Taxes on imports that raise the cost of imported goods.

  • Subsidies: Government payments to domestic producers to bolster competitiveness against foreign products.

  • Import Quotas: Direct restrictions on the quantity of goods imported.

  • Voluntary Export Restraints: Quotas imposed by the exporting country at the request of the importing government.

  • Local Content Requirements: Mandate that a certain fraction of a good be produced domestically.

  • Antidumping Policies: Measures to counter the sale of goods at unfair prices.

  • Administrative Policies: Regulations designed to hinder imports.

Tariffs

• A tariff is a tax on imports that increases the price of foreign products.

  • Specific Tariffs: Fixed charges for each unit of imported goods (e.g., per ton).

  • Ad Valorem Tariffs: Levied as a percentage of the value of the imported good. Example: $100 on the first $10,000, $120 on the next $20,000.

Reasons for Imposing Tariffs

• Governments implement tariffs for several reasons:

  • Increase Revenue: Provide additional funds to the government.

  • Protect Domestic Producers: Shield local industries from foreign competition.

  • Drive Up Prices: Force consumers to pay more for specific imports.

  • Economic Efficiency: Overall, tariffs can reduce the global economy’s efficiency due to protectionism.

Subsidies

• A subsidy is a government payment to domestic producers that helps them:

  • Compete against low-cost foreign imports.

  • Access export markets.

• Economic Impact: The costs of subsidies generally fall on consumers through higher prices.

Import Quotas & Voluntary Export Restraints

• Import Quota: Directly restricts the quantity of goods imported into a country.

  • Tariff Rate Quotas: Combine quotas and tariffs to apply lower tariffs on imports within the quota.

• Voluntary Export Restraints: Exporting countries impose quotas on themselves at the request of the importing nation's government.

• Quota Rent: The additional profit domestic producers make when imports are limited by quotas.

Local Content Requirements

• Local Content Requirement: Mandates a specific fraction of a good to be produced domestically, either by components percentage or value.

• Pros and Cons: Benefits local producers but results in higher consumer prices.

Administrative Policies & Dumping

• Administrative Policies: Aim to complicate the entry of imports into a country, potentially denying consumers superior foreign products.

• Dumping: Selling goods below production costs or below fair market value to offload excess stock.

  • Can be viewed as predatory if used to gain market share.

Addressing Dumping Complaints

• U.S. firms that suspect dumping can file complaints with the government.

  • If complaints are valid, antidumping duties may be imposed.

Historical Context of the World Trading System

• General Agreement on Tariffs and Trade (GATT): Established in 1947 and governed through the mid-1990s.

• World Trade Organization (WTO): Established in 1995, succeeding GATT

WTO Focus Areas

• The WTO advocates and facilitates trade deals focusing on:

  • Anti-dumping policies

  • Protectionism in agriculture

  • Protecting intellectual property

Case for Government Intervention

• Reasons for Intervention: Political and economic arguments:

  • Political Arguments: Protect domestic jobs, national security, and consumer safety, retaliate against unfair foreign practices.

  • Economic Arguments: Support infant industries, strategic trade advantages can lead to trade escalation.

Implications for Managers

• Trade barriers directly impact firm strategies concerning exports and manufacturing locations.

• Firms can engage in promoting or opposing trade regulations through lobbying and advocacy.

Policy Implications

• International firms have incentives to advocate for free trade to maintain competitive strategies and avoid protectionist policies.

• While government protection might result in short-term benefits, it can lead to retaliatory actions, complicating global production strategies.