Chapter 7 Summary: Government Policy and International Trade

Instruments of Trade Policy

• Seven main instruments:

  1. Tariffs: Taxes on imports, either specific (fixed charge per unit) or ad valorem (percentage of value).

  2. Subsidies: Government payments to domestic producers.

  3. Import quotas: Direct limits on the quantity of imports.

  4. Voluntary export restraints (VER): Quotas imposed by the exporting country.

  5. Local content requirements: Demand for a specific fraction of a good to be produced domestically.

  6. Administrative policies: Bureaucratic rules that hinder imports.

  7. Antidumping duties: Tariffs on foreign firms selling goods below cost or "fair" market value (dumping).

Tariffs

• Increase government revenues.

• Protect domestic producers by raising the cost of imported goods.

• Lead to higher prices for consumers.

• Generally pro-producer and anti-consumer, reducing overall world efficiency.

Subsidies

• Help domestic producers compete and gain export markets.

• Costs are typically absorbed by consumers.

Import Quotas and Voluntary Export Restraints

• Import quota: limits quantity of imports.

• Tariff rate quota: lower tariff within quota, higher tariff above quota.

• Voluntary export restraint (VER): quota imposed by exporting country.

• Quota rent: extra profit due to limited supply.

Local Content Requirements

• Benefit domestic producers and jobs.

• Result in higher prices for consumers.

Antidumping Policies

• Protect domestic producers from unfair foreign competition (dumping).

• U.S. firms can file complaints with the Commerce Department and the International Trade Commission (ITC).

• Countervailing duties may be imposed if the complaint has merit.

The Case for Government Intervention

• Political Arguments:

  • Protecting jobs and industries.

  • Protecting national security.

  • Retaliating against unfair practices.

  • Furthering foreign policy objectives.

  • Protecting human rights.

• Economic Arguments:

  • Infant industry argument: protecting new industries until they become competitive.

  • Strategic trade policy: helping domestic firms gain first-mover advantages.

The Revised Case for Free Trade

• Strategic trade policies can lead to retaliation and trade wars.

• Government intervention can be influenced by special interest groups.

Development of the World Trading System

• General Agreement on Tariffs and Trade (GATT): Established in 1947 to liberalize trade.

• World Trade Organization (WTO): Succeeded GATT in 1995, encompassing GATT, GATS, and TRIPS.

WTO

• Members account for 98% of world trade.

• 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.

Multilateral and Bilateral Trade Agreements

• Agreements designed to capture gains from trade beyond WTO treaties.

• Increasing number of regional and bilateral agreements.

The World Trading System Under Threat

• Events suggesting a threat to free trade: Brexit and policies of the Trump administration.

Managerial Implications

• Trade Barriers and Firm Strategy:

  • Tariffs raise exporting costs.

  • Quotas limit market access.

  • Firms may need more local production.

  • Future trade barriers influence firm strategy.

  • Antidumping actions limit aggressive pricing.

• Policy Implications:

  • Firms lobby for free trade.

  • Drawbacks of government intervention: protects the inefficient, invites retaliation, and can be captured by special interests.