Slide1: Five C h a p t e r The Political Economy of International Trade Global Trade and Investment Environment


Governments and Trade: Governments and Trade Free trade: a government does not restrict what its citizens can buy from or sell to another country Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy Higher level domestic consumption; more efficient use of resources Stimulation of domestic growth and wealth creation Slide 5-1


Governments and Trade: Governments and Trade More often governments manage trade (… level the “playing-field”) Restriction of imports: protectionist intervention Promotion of exports Trade promotion and FDI incentives Free-trade “Good” or “Bad”? Social issues related to free-trade Implications for business and individual groups Slide 5-2


Instruments of Trade Policy: Instruments of Trade Policy Tariffs Subsidies Import quotas Voluntary export restraints Local content requirements Anti-dumping policies Administrative policies Slide 5-3


Tariffs: Taxes levied on imports (also sometimes on exports) Specific tariff: fixed charge for each good imported Ad valorem tariff: a % of imported goods value Who gains: Government Domestic producers (at least in the short run) Employees of protected industries keep their jobs Who loses: Consumers who pay higher prices The economy which remains inefficient Employees of protected industries who don’t develop new skills Tariffs Slide 5-4


Subsidies: Subsidies Government payments to domestic producers Cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders Subsidies are aimed at lower costs to help Compete against cheaper imports Gain export markets Increase domestic employment Local producers achieve first-mover advantage in emerging industries Governments tax individuals… to pay for subsidies Consumers buy more expensive goods with lower disposable incomes Slide 5-5


Slide7: Import Quotas and Voluntary Export Restraints Import quota: government specifies how much of what product can be imported from which countries Voluntary export restraint: a quota imposed by the exporting country officially or unofficially Local Content Requirements Some % of a good has to be produced domestically with local raw materials and local labor Used by LDCs to Achieve technology transfer, skills transfer Shift manufacturing base to a higher technological level Similar effects to those of import quotas Slide 5-6


Slide8: Anti-dumping Policies Dumping: selling goods in an overseas market At below their production costs or Below “fair market value” Anti-dumping policies punish producers who dump and protect domestic producers Administrative policies Bureaucratic rules that make it difficult for imports to enter a country Slide 5-7


Political Arguments for Intervention: Political Arguments for Intervention National security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives Economic Arguments for Intervention Infant industry protection Strategic trade policy Slide 5-8


International Trade Cooperation (!): International Trade Cooperation (!) U.S.A. and: foreign companies trading with Cuba any company dealing with Iran-Iraq W.T.O. in place but... disputes with China dealt on bilateral basis (not a member) disputes with Japan dealt on bilateral basis (a member) trade blocks proliferating (EU, NAFTA, ASEAN) Slide 5-9


The Global Trading System: The Global Trading System Smith to Great Depression Britain adopts free trade in 1846 Smoot-Hawley act (US) 1930 aimed at employment protection (caused by the Great Depression) 1947-1979: GATT, Trade Liberalization, Economic Growth 1980-1993: GATT needs fixing Uruguay round of GATT negotiations (1986-1993) Creation of WTO with powers to implement trade agreements Slide 5-10


GATT: GATT Pre-WWII protectionism Smoot-Hawley +57% import tariffs (1930) UK, France, Italy followed suit world depression in ‘30s Havana Conference (1947) -> GATT 125 countries by 1994 small staff in Geneva tariffs fm 40% in ‘47 to 3% in ‘95 trade 15x to $6.75 trillion in ‘92 WTO superceded GATT in 1995 Slide 5-11


Uruguay Round of GATT negotiations: Uruguay Round of GATT negotiations Tariffs cut further Agricultural Policy Modified: cut price supports 20%, export subsidies 36% For this policy: USA, Argentina, Australia, Canada Anti: Japan, Korea, India, EU Services given prominence: developed set of principles Intellectual Property Rights protected further: patents, copyrights, trademarks, brand names WTO created: to implement Uruguay round, controversial Slide 5-13


WTO: Early Experience: WTO: Early Experience WTO as a global policeman Up to 1995-1999: 160 ± cases brought for decision 30 ± withdrawn after direct discussions between countries in dispute 100 + undergoing direct discussion 20 ± in final stage of solution implementation 4 have been settled 7 closed with no need for action GATT dealt with 196 cases from 1947-1995! Slide 5-14


The WTO: The WTO 145 members in 2003 Represents 90% of world trade 9 of 10 disputes satisfactorily settled Tariff reduction from 40% to 5% Trade volume of manufactured goods has increased 20 times


“So what” for Business”: “So what” for Business” Trade barriers affect firm strategy Government policy has direct impact on firm business Slide 5-15