International Business Chapter 7
the General Agreement on Tariffs and Trade (GATT)
-After WWII, the U.S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). -The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade. Over 100 countries became members of GATT, and worked together to further liberalize trade.
WTO Policing
So far, the WTO's policing and enforcement mechanisms are having a positive effect. In general, countries have adopted WTO recommendations for trade disputes.
voluntary export restraint (VER
A voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government.
Ad valorem tariffs
Ad valorem tariffs are levied as a proportion of the value of the imported good.
export tariff
An export tariff is a tax placed on the export of a good. The goal behind an export tariff is to discriminate against exporting in order to ensure that there is sufficient supply of a good within a country.
Protectionist trends
During the 1980s and early 1990s the world trading system as "managed" by GATT came under strain. First, Japan's economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan's perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries. Second, persistent trade deficits by the United States, the world's largest economy, caused significant economic problems for some industries and political problems for the government. Third, many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT (e.g. VERs).
Policy Implications
In general, international firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies. While there may be short-term benefits to having governmental protection in some situations, in the long run these can backfire and other governments can retaliate
The Global Trading system
Many governments recognize the value of unrestricted free trade, but are hesitant to unilaterally lower their trade barriers in case other countries do not follow suit. Since World War II, and international trading framework has evolved that enables governments to negotiate a set of rules to govern cross-border trade and lower trade barriers. For the first 50 years, the framework was known as the General Agreement on Tariffs and Trade (GATT). More recently, it has been known as the World Trade Organization (WTO).
Political arguments for government intervention
Political arguments for government intervention cover a range of issues, including preserving jobs, protecting industries deemed important for national security, retaliating against unfair foreign competition, protecting consumers from "dangerous" products, furthering the goals of foreign policy, and advancing the human rights of individuals in exporting countries.
Specific tariffs
Specific tariffs are levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil).
Unresolved issues and the Doha round
Substantial work still remains to be done on the international trade front. Four issues on the current agenda of the WTO are 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, and continued high tariffs on nonagricultural goods and services in many nations.
Protecting Intellectual Property
The agreement to protect intellectual property (TRIPS) obliges WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. The basis for this agreement was a strong belief among signatory nations that the protection of intellectual property rights is an essential element of the international trading system
quota rent
The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent
Anti Dumping actions
There has been a proliferation of antidumping actions in recent years, perhaps because of the rather vague definition of what constitutes dumping. The WTO is encouraging members to strengthen the regulations governing the imposition of antidumping duties.
Great Depression
Up until the Great Depression of the 1930s, most countries had some degree of protectionism. Great Britain, as a major trading nation, was one of the strongest supporters of free trade.
The World Trade Organization
When the WTO was established, its creators hoped the WTO's enforcement mechanisms would make it a more effective policeman of the global trade rules than the GATT had been. The WTO encompassed GATT along with two sister organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
dumping
dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value.
Export tariffs
export tariffs have two objectives: first, to raise revenue for the government, and second, to reduce exports from a sector, often for political reasons.
Krugman
-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. A country that attempts to use such policies will probably provoke retaliation. -Governments do not always act in the national interest when they intervene in the economy. Instead special interest groups may influence governments. Thus, a further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special interest groups within an economy, who will distort it to their own ends.
tariff rate quota
A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota , a lower tariff rate is applied to imports within the quota than those over the quota.
A local content requirement (LCR)
A local content requirement (LCR) is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally).
Subsidy
A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets.
Tariffs
A tariff is a tax levied on imports (or exports). Tariffs fall into two categories. In most cases, tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods. However, tariffs also produce revenue for the government.
Administrative trade policies
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country.
the Uruguay Round
Against the background of rising protectionist pressures, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the most ambitious round to date
Smoot-Hawley Act
Although the world was already in a depression, in 1930 the United States enacted the Smoot-Hawley Act, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further. -Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products
export ban
An export ban is a policy that partially or entirely restricts the export of a good.
Import quota
An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms.
Antidumping policies
Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition.
WTO: Experience to Date
At the time of its establishment, the great hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals, particularly in such areas as services. In general, the experience so far has been encouraging.
countervailing duties
If a complaint has merit, the Commerce Department may impose an antidumping duty on the offending foreign imports (antidumping duties are often called countervailing duties ).
Trade agreements
In 1997, 68 countries that account for more than 90 percent of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. Similarly, 102 countries pledged to open to varying degrees their banking, securities, and insurance sectors to foreign competition. Like the telecommunications deal, the agreement covers not just cross-border trade, but also foreign direct investment.
New Round of Talks: Doha
In late 2001, the WTO launched a new round of talks at Doha, Qatar. The agenda includes cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of anti-dumping laws.
Tariffs
The government gains because the tariff increases government revenues. Domestic producers gain because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers lose because they must pay more for certain imports.
WTO in Seattle
The 1999 meeting of the WTO in Seattle was important not only for what happened between the member countries, but also for what occurred outside the building. Inside, members failed to agree on how to work toward the reduction of barriers to cross-border trade in agricultural products and cross-border trade and investment in services. Outside, the WTO became a magnet for various groups protesting free trade.
The Uruguay Round
The Uruguay Round dragged on for seven years before an agreement was reached on December 15, 1993. It went into effect July 1, 1995. The Uruguay Round contained the following provisions: 1. Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to be scrapped on more than 40 percent of manufactured goods. 2. Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history. 3. Agricultural subsidies were to be substantially reduced. 4. GATT fair trade and market access rules were to be extended to cover a wide range of services. 5. GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks (intellectual property). 6. Barriers on trade in textiles were to be significantly reduced over 10 years. 7. The World Trade Organization was to be created to implement the GATT agreement.
Protectionism in Agriculture
The WTO is concerned with the high level of tariffs and subsidies in the agricultural sector of many economies. However, the advanced countries of the world defend the current system because they want to protect their producers from lower-cost producers from developing nations.
Market Access for Nonagricultural Goods and Services
The WTO would like to bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates. The hope is that at some point, rates would move to zero.
The infant industry argument
The infant industry argument is by far the oldest economic argument for government intervention. Alexander Hamilton proposed it in 1792. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition.
The strategic trade policy argument
The strategic trade policy argument has two components. First, it is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries. The second component of the strategic trade policy argument is that it might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages.
Trade Barriers and Firm Strategies
Trade barriers are a constraint upon a firm's ability to disperse its productive activities. First, trade barriers raise the cost of exporting products to a country. Second, voluntary export restraints (VERs) may limit a firm's ability to serve a country from locations outside that country. Third, to conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise. All of the above effects are likely to raise the firm's costs above the level that could be achieved in a world without trade barriers. In addition, the threat of antidumping action could limit the ability of a firm to use aggressive pricing as a way to gain market share.
