ch 7

Non tariff barriers: direct price influences

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Other limits on Employment (fighting unemployment)

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import Restrictions as a Bargaining Tool

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Shifting people out of Agriculture can create problems

1. Underemployed may lose the safety net of their extended families, while many migrating to urban areas cannot find suitable jobs, housing, and social services. (i.e. demands on social and political services in cities may increase) 2. Improved agricultural practices may be a better means of achieving economic success than a drastic shift to industry. 3. Industrial jobs for low skilled workers may not be forthcoming due to technology

compound duty

A combination of specific and ad valorem duties

Quotas

A quota limits the quantity of a product that can be imported or exported in a given time frame, typically per year.

Main difference between tariff and quota (?)

A tariff generates government revenue, while a quota, unless it is sold, does not.`

Balance of Trade Adjustments

A trade deficit influences

Problems with Maintaining or extending spheres of influence

Affects other countries exports, makes non-favored countries less competitive, hurts firms and individuals who are not responsible for government's policies

Conflicting Outcomes of Trade protectionism

All countries seek to influence trade and respond to their economic, social, and political objectives.

Voluntary Export Restraint (VER)

An international agreement that shows that exporting countries voluntarily agree to restrict their exports. country A asks country B to reduce its exports to country A VERs are easier to switch of than import quota and helps political relations in a country

Standards and Labels

Countries can devise classification, labeling, and testing standards to allow the sale of domestic products, but obstruct foreign made ones.

specific permission requirements

Countries may require that importers or exporters secure governmental permission before transacting trade. import or export license

Overcoming market Imperfection

Countries offer potential exporters many business development services, such as market information, trade expositions, and foreign contacts.

Developing an Industrial Base

Countries seek protection to promote industrialization be- cause that type of production can use surplus agricultural workers more easily, • brings in investment funds, • diversifies the economy, • brings faster growth than primary products do.

effective tariff controversy

Developed countries argue that their processed portion of commodities have higher tariffs than the published rated

Tariffs is a _____ influence

Direct Price

Who should Bear the Cost

Even if policymakers choose the right industries, some economic segment must absorb the high early cost before domestic production becomes internationally viable. This burden may fall on consumers who pay higher prices for the protected products or on taxpayers who pay for subsidies. Such costs should be compared with those of unemployment.

Prevention of Dumping (in economic relationships)

Exporting below-cost or below home-country price is dumping. Companies can afford to dump products if they are subsidized or if they can charge high prices in their home market. dumping maybe used to introduce a new product, • may cause higher prices or subsidies in the exporting country, • is hard to prove.

Tools for maintaining Essential Industries

FDI regulations, Regulatory Standards, Subsidies, Export Bans

Economic rationales

Fighting unemployment Protecting infant industries Promoting industrialization Improving comparative position

Agricultural subsidies

Food and supplies to critical to be left to chance, creates surplus, government pays even more to discourage over production

How companies deal with governmental trade influences

Four options stand out for companies 1. Move operations to another country. 2. Concentrate on market niches that attract less international competition. 3. Adopt internal innovations, such as greater efficiency or superior products. 4. Try to get governmental protection.

Economic rationales for Gov trade intervention

Governments intervene in international trade for either economic or noneconomic reasons,

Aid and loans

Governments may give aid and loans to other countries but require that the recipient spend the funds in the donor country;

Reciprocal Requirements

Governments may require that foreign suppliers accept products in lieu of money. Importing countries sometimes require that whole or partial payment be made to exporters in merchandise rather than fully in currency, a transaction known as barter trade.

Stakeholders and their Conflicting Demands: What do they want? Can everyone win?

Governments must satisfy, restrict, or promote numerous facets of society and business... such as industry groups, local communities, consumers, employees, NGOs, citizens, all sizes of firms etc...

Essentially

Governments sometimes prohibit private companies, foreign or domestic, from operating in some sectors because they feel the services are essential and provide social stability.

Maintaining or extending spheres of influence

Governments use trade to support their spheres of influence—giving aid and credits to, and encouraging imports from, countries that join a political alliance or vote a preferred way within international bodies. For example, the EU and 78 states from Africa, the Caribbean, and the Pacific participate in the Cotonou Agreement that formalizes an array of economic and political ties and economic issues.

countertrade

In countertrade or offsets, a government in the importing country requires the exporter to provide it with additional economic benefits such as jobs or technology as part of the transaction.

Maintaining Essential Industries

In protecting essential industries, countries must • determine which ones are essential, • consider costs and alternatives, • consider political and economic consequences.

ad valorem duty

Is a tariff based on the percentage of the item's value

What is the product?

Miss classifying a product is an easy way to change its corresponding tariff. Classification differences may cost or save companies millions

What is the Import Worth? (customs valuations)

Most countries have developed valuation procedures Import invoice information is used by government agents to appraise on the basis of the value of identical goods arriving at about the same time Agents in importing countries often use too much discretionary power and levy higher duty taxes

Goal: Economic Relationships with other countries (improving comparative position)

Nations monitor their absolute economic situations and compare their performance to other countries. Among their many practices to improve their relative positions, four stand out: making balance-of-trade adjustments, gaining comparable access to foreign markets, using restrictions as a bargaining tool, and controlling prices.

Fighting Unemployment

Probably no pressure group is more effective than the unemployed; no other group has more time and incentive to protest publicly and contact government representatives.

Essential industry problems

Problems : Hurts foreign competitors, affects other countries' exports, how to define "essential"?

Collectively, governmental actions to influence international trade are known as

Protectionism

Problems for exporters (reciprocal requirements)

Reciprocal requirements necessitate that exporters assess the value and find markets for goods outside their expertise, engage in complicated operating ar- rangements, and undertake activities outside their proficiency. Raytheon, which makes such products as missiles and radar systems, had to undertake shrimp farming to gain a Saudi Arabian contract.

Immigration

Satisfying the standards of a particular country is no guarantee that a foreigner can then work there.

Restrictions on Services

Service is the fastest-growing sector in international trade.

Standards

Some services require face-to-face interaction between professionals and clients, and governments limit entry into many of them to ensure practice by qualified personnel. The licensing requirements include such professionals as accountants, actuaries, architects, electricians, engineers, gemologists, hairstylists, lawyers, medical personnel, real estate brokers, and teachers. Little reciprocal recognition in licensing because contries' occupational standards and requirements differ substantially

Tools for protecting infant industries

Subsidies, FDI Regulations, Domestic Content Laws

Tariffs as sources of revenue

Tariffs are not a major source of revenue for developed countries: because collection costs usually exceed the yield In many developing countries they are a major source of revenue because they are easier to collect than income taxes

Tools for fighting unemployment

Tariffs, Quotas, Domestic Content Laws

Growth in Manufactured Goods

Terms of trade may deteriorate because • demand for primary products grows more slowly than manufactured ones, • production cost savings for primary products will be passed on to consumers. terms of trade: goods The quantity of imports that a given quantity of a country's exports can buy

Protecting "Infant Industries"

The infant-industry argument holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own. the argument assumes production becomes more competitive over time because of • increased economies of scale • greater worker efficiency.

The role of stakeholders

Those most affected by trade regulations are most apt to speak up (workers, owners, suppliers, local politicians) People threatened by losing their jobs tend to voice their views often and loudly conversly, consumer stakeholders don't have enough threatened by regulation so lobbying for removal of regulations simply is not an effective use of time or resources

two practical reasons for rejecting the idea of fairness:

Tit-for-tat market access can lead to restrictions that may deny one's own consumers lower prices Governmental negotiation and and monitoring of separate agreements for each of the thou- sands of different products and services that might be traded would simply be impractical.

Preserving national culture

To help sustain a collective identity that sets their citizens apart from other nationalities, governments prohibit exports of art and historical items deemed to be part of their national heritage.

Tools for Maintaining or extending spheres of influence

Tools : Tied aid, subsidies, preferential tariffs/quotas, embargoes

Promoting acceptable practices abroad

Trade limitations may be used to compel a foreign country to amend an objectionable practice.

Import substitution and export-led development

Traditionally, developing coun- tries fostered industrialization by promoting import substitution—restricting imports to boost local production of products they would otherwise import. In contrast, some countries have achieved rapid economic growth by promoting the development of industries with export potential, an approach known as export-led development.

Risks in designating industries (protecting Infant industries ii)

Two main areas of concern for governments Determining Probability of industry Success Who should bear the cost of supporting the ii

Major Instruments of Trade Control

Two major tools: those that affect prices and those that limit the amount of a good that can be traded

Customs Valuation

Valuation Import tariff assessments depend on the product, price, and origin— which tempts exporters and importers to declare these wrongly to pay a lower duty and tempts governments to declare wrongly as a protectionist measure.

Not-for-profit services

When a government privatizes these in- dustries, it customarily prefers local ownership and control.

Prospect of retaliation

When restricting imports to create jobs, the countries losing those jobs may retaliate with their own restrictions. However, large trading countries are more important in the retaliation process. For instance, China would have more power to retaliate than, say, Mauritius, to U.S. limits on clothing imports.

Where does the product originate?

Where a product is from may impact tariff duty because of trade agreements etc...

Surplus workers

Workers Disguised unemployment is high in rural areas of many developing countries, where many people effectively contribute little, if anything, to the agricultural output. Consequently, they can move into the industrial sector without significantly reduc- ing agricultural output. industrialization argument presumes that, although a country may develop an inefficient and non-globally competitive industrial sector, it will achieve eco- nomic growth by enabling the unemployed and underemployed to work in industry. 5

optimum-tariff theory

a foreign producer will lower its prices if the importing country places a tax on its products

Diversification

a greater dependence on manufacturing does not guarantee diversification of export earnings. The population of many developing economies is small; a move to manufacturing may shift dependence from one or two agricultural commodities to one or two manufactured products, which face com- petitive risks and potential obsolescence. Although demand and prices for commodities fluctuate markedly, a shift to production of manufactures creates competitive risk.

import tariff

a tax levied by a nation on goods imported into the country

transit tariff

a tax placed on goods passing through a country

Institutional Factors that pressure government to regulate trade

are the institutional Factors Affecting the Flow of goods and Service i.e. 1st picture in lecture notes

Tied aid

assistance given by one country to another that requires the receiving country to buy goods and services from the donor country tied loans sometimes require the recipient to use output and suppliers that may not be the best.

Administrative delays

closely akin to specific permission requirements are administrative customs delays that may be caused by intention or inefficiency

Embargoes

complete ban on the import or export of certain products

Tariff Barriers

directly affect prices

Tariffs collected by the exporting country

export tariffs,

Comparable access is also presented from a

fairness perspective For instance, the U.S. government permits foreign financial service firms to operate in the United States, but only if their home governments allow U.S. financial service firms equivalent market access.

Determining Probability of success

governments must identify those industries that have a high probability of success, and this is hard. if a protected industry fails to become globally competitive, its affected stakeholders may successfully prevent the imports that benefit consumers.

comparable access argument

industries are entitled to the same access to foreign markets as foreign industries have to theirs.

Investment inflows

inflows Import restrictions, applied to spur industrialization, also may increase FDI, which provides capital, technology, and jobs. If import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area.

Tariff

is a tax levied on a good shipped internationally.

Import quotas

limitations set by a government on the amount of a product allowed to enter or leave a country normally raise prices because they (1) limit supplies and (2) provide little incentive to use price competition to increase sales.

Analyzing trade-offs (fighting unemployment)

many groups call for protectionism to increase or protect employment. However, evidence suggests that employment is better dealt with through fiscal and monetary policies.

nontariff barriers

may directly affect either price or quantity.

Import restrictions to create domestic employment (fight unemployment)

may lead to retaliation by other countries, • affect large and small economies differently, • reduce import handling jobs, • may decrease jobs in another industry, • may decrease export jobs because of lower incomes abroad. (ie less exports to restricting country)

essential industry argument

nations apply trade restrictions to protect crucial domestic industries so that they are not dependent on foreign supplies during hostile political periods For example, the United States subsidizes domestic silicon production so that its computer-chip makers need not depend on foreign suppliers.

Subsidies

offer direct assistance to companies to boost their competitiveness.

Export quotas

provide domestic consumers a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to attempt to raise prices abroad by restricting foreign supply.

Circumvent quotas

quotas, companies sometimes convert the product into one for which there is no quota. For instance, the United States maintains sugar import quotas that result in its sugar prices averaging more than the world market price. As a result, some U.S. candy producers have moved plants to Mexico and Canada where they can buy lower-cost sugar and import the candy duty-free to the United States.

Import tariffs ___ the price of imported goods by taxing them. What does this do for domestic producers?

raise. Gives domestic producers a relative price advantage

Foreign exchange control

requires an importer to apply to a government agency to secure the foreign currency to pay for the product

Buy Local Legislation

sets rules whereby governments give preference to domestic production in their purchases Governments sometimes legislate a percentage of domestic content.

Specific Duty

tariff assessed on a per-unit basis

Why do governments intervene in trade?

to attain economic, social, or political objectives.\ Officials enact trade policies that they reason will have the best chance to benefit their nation and its citizens—and, in some cases, their personal political longevity.

Noneconomic Rationales for Government Intervention

• Maintaining essential industries (especially defense firms ) • Promoting acceptable practices abroad • Maintaining or extending spheres of influence • Preserving national culture

If domestic producers have less access to foreign markets than foreign producers' have to their market,

• they may be disadvantaged, • restricting foreign entry may disadvantage domestic consumers, • negotiating equal market access for each product is impractical.