Free Trade
occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
How Governments intervene in markets
Tariffs
Subsides
Import Quotas
Voluntary Export Restraints
Anti-Dumping policies Countervailing Duties
Administrative Policies
Tariffs
taxes levied on imports that effectively raise the cost of imported products relative to domestic products
Specific tariffs
levied as a fixed charge for each unit of a good imported
Ad valorem tariffs
levied as a proportion of the value of the imported good
Tariffs...
increase government revenues
force consumers to pay more for certain imports
are pro-producer and anti-consumer
reduce the overall efficiency of the world economy
Subsidies are
government payments to domestic producers
Subsidies
help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs
Import Quotas
restrict the quantity of some good that may be imported into a country
Tariff rate quotas
a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
A quota rent
the extra profit that producers make when supply is artificially limited by an import quota
Voluntary Export Restraints
are quotas on trade imposed by the exporting country, typically at the request of the importing country's government
Effects of Voluntary Export Restraints
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
Local Content Requirements
demand that some specific fraction of a good be produced domestically
Effects of Local Content Requirements
benefit domestic producers
consumers face higher prices
Administrative Polices
bureaucratic rules designed to make it difficult for imports to enter a country
Effect of Administrative Policy
polices hurt consumers by limiting choice
Antidumping Policies - aka countervailing duties
designed to punish foreign firms that engage in dumping and protect domestic producers from "unfair" foreign competition
Dumping
selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their "fair" market value
Effects of Dumping
enables firms to unload excess production in foreign markets
may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices
Why do Governments Intervene with Markets
Political reasons
Economic reasons
Protecting jobs
the most common political reason for trade restrictions
results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers
Protecting industries deemed important for national security such as
industries like aerospace or electronics are often protected because they are deemed important for national security
Retaliating to unfair foreign competition
is when governments take, or threaten to take, specific actions, other countries may remove trade barriers
--if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
Protecting consumers from "dangerous" products
limit "unsafe" products
Furthering the goals of foreign policy
preferential trade terms can be granted to countries that a government wants to build strong relations with
Effects of furthering the goals of foreign policy
trade policy can also be used to punish rogue states
the Helms-Burton Act and the D'Amato Act, have been passed to protect American companies from such actions
Protecting the human rights of individuals in exporting countries
through trade policy actions
the decision to grant China MFN status in 1999 was based on this philosophy
Political Arguments for Govt. Intervention in Markets
Protecting the human rights of individuals in exporting countries
Furthering the goals of foreign policy
Protecting consumers from "dangerous" products
Retaliating to unfair foreign competition
Protecting industries deemed important for national security
What Are The Economic Arguments for Govt. Intervention in Markets
The infant industry argument
Strategic trade policy
Strategic trade policy
in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages
governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage
The infant industry argument believes that
an industry should be protected until it can develop and be viable and competitive
--accepted as a justification for temporary trade restrictions under the WTO
The infant industry argument
Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government
When Should Governments Avoid Using Trade Barriers
Paul Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries
Krugman argues that since spec
How the Current World Trading System Emerged
Until the Great Depression of the 1930s, most countries had some degree of protectionism
Smoot-Hawley tariff (1930)
After WWII, the U.S. and other nations realized the value of freer trade
established the General Agreement on Tariffs and Trade (GATT) - a
How intellectual property regulation effected the Current World Trading System
The Uruguay Round of GATT negotiations began in 1986 focusing on
Services and intellectual property
going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture
The World Trade Organization - effect on the current World Trading system
it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules
Legislature which caused the Current World Trading system to emerge
The WTO encompassed GATT along with two sisters organizations
the General Agreement on Trade in Services (GATS)
the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)
The WTO has emerged as an effective advocate and facilitator of
the rise of anti-dumping policies
the high level of protectionism in agriculture
the lack of strong protection for intellectual property rights in many nations
continued high tariffs on nonagricultural goods and services in many nations
The Current Agenda of the WTO
The agenda include
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
The Future of the WTO
What Trade Barriers Mean For Managers
Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm
Trade barriers raise the cost of exporting products to a country
Voluntary export restraints (VERs) may limit a firm's abili