International Business Chapter 7: Government Policy and International Trade

What are antidumping policies?

designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition

What are the two economic arguments for government intervention?

1) Infant Industry Argument: new industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with firms of developed nations - gives rise to inefficiencies 2) Strategic Trade Policy: gov't policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market - can help raise national income - help firms get first mover advantages and over come high entry barriers

What are the six political arguments for government intervention?

1) Protecting Jobs and Industries 2) Protecting National Security 3) Retaliating 4) Protecting Consumers 5) Furthering Foreign Policy Objectives 6) Protecting Human Rights

What are the 2 goals for export tariffs?

1) Raise revenue for the gov't 2) Reduce exports from a sector, often for political reasons

What are the two categories for tariffs?

1) Specific: tariff levied as a fixed charge for each unit of good imported 2) Ad valorem: tariff levied as proportion of the value of an imported good

What are the 7 main instruments of trade policy?

1) Tariffs 2) Subsidies 3) Import quotas 4) Voluntary export restraints 5) Local content requirements 6) Administrative policies 7) Antidumping duties

What is an import quota?

A direct restriction on the quantity of a good that can be imported into a country. Enforced by issuing import licenses

What are local content requirements?

A requirement that some specific fraction of a good be produced domestically - used by developing countries to promote local manufacturing - Buy America Act

What is free trade?

A situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country

What is a tariff?

A tax levied on imports or exports

What industry is one of the largest beneficiaries of subsidies?

Agriculture

What are the consequences of free trade, according to the theories of Smith and Ricardo?

Both static economic gains (because free trade supports a higher level of domestic consumption) and dynamic economic gains (because free trade stimulates economic growth and the creation of wealth)

What are examples of nations committed to free trade but having their own protectionist measures?

- US Chicken Tax, Sugar tax - EU quotas on agricultural products

What are anti dumping duties also known as?

Countervailing duties

Do import tariffs increase or decrease the overall efficiency of the world economy?

Decrease

Who suffers with tariffs?

Domestic consumers

What is quota rent?

Extra profit producer make when supply is artificially limited by an import quota

What is a subsidy?

Gov't financial assistance to a domestic producer

Who gains with tariffs?

Government and domestic producers

Do administrative policies help or hurt consumer?

Hurt consumers by denying access to foreign products (or increasing their cost)

Are export tariffs more or less common than import tariffs?

Less common

What is a tariff rate quota?

Lower tariff rates applied to imports within the quota than those over the quota

What are administrative trade policies?

Policies, typically adapted by government bureaucracies, that can be used to restrict imports or boost exports - mastered by Japan

True or False: Detractions are pro consumer and anti producer

TRUE

True or False: Subsidies can help firms achieve first mover advantages

TRUE

True or False: Tariffs are generally pro-producer and anti consumer.

TRUE

True or False: Tariffs produce revenue for governments

TRUE

True or False: We can fairly say that except for detractions, all the other measures favor producers over consumers

TRUE

What is a detraction?

Tax levied on exports that effectively drops the price of the product sold in the country

What do detractions do?

They increase government revenues, protect domestic consumers, but may make producers not competitive in the world.

How do subsidies help producers?

They lower production costs, which helps competing against foreign imports and gaining export markets

Why are tariffs placed on imports?

To protect domestic producers from foreign competition by raising price of imported good

What are the drawbacks using strategic trade policy?

Using strategic trade policy may provoke retaliation from other nations and the ensuing trade wars would leave all countries worse off. Gov'ts may also benefit special trade groups over general consumers with some interventions

Do import quotas and VER benefit domestic consumers?

Yes, by limiting competition from abroad (also increasing prices for consumers)

What is a voluntary export restraint (VER)?

a quota on trade imposed from the exporting's side, instead of the importing country's government

What is dumping?

selling goods in a foreign market for less than their cost of production or below their "fair" market value

What is the WTO currently focusing on?

- Cutting tariffs on industrial goods and services - Phasing out subsidies to agricultural products - Reducing barriers to cross-border investment - Limiting the use of anti dumping laws - TRIPS impose WTO members enforcement of patents lasting 20 years and copyrights lasting 50 years

How did the world trading system develop?

- Great Britain adopts free trade in 1846 with repeal of Corn Laws - Smoot-Hawley Act enacted in 1930 by US Congress to erect a wall of tariff barriers against imports into the US - GATT established in 1947 - Uruguay Round of GATT created WTO and led to large decrease in tariffs - General Agreement on Trade in Services (GATS) extends free trade to services - Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) attempts to bring intellectual property under common rule

How can governmental instruments of trade policy constrain international trade?

- They may increase the cost of foreign products to protect producers or manufacturers (reducing imports) - They may decrease the cost of local products to protect consumers (impeding exports) - Imposing non-trade barriers (prohibitively expensive standards) - They may facilitate international trade by increasing competitiveness not on efficiency grounds (promoting exports)