Chapter 2 Activity

WTO

It sets many rules governing trade among its members, provides a panel of experts to hear and rule on trade disputes among members, and issues binding decisions.

You are about to read a short case about the effects of protectionism on trade in the United States. Included in the case is discussion of recent developments in trade relations with China. You will be asked to answer questions linking your knowledge from the chapter to the situation detailed in the case. Review the text material on the effects of protectionism and the different types of trade barriers. Then, read the case below and answer the questions that follow. When it comes to running shoes, the U.S. government is considering cutting tariffs on imported shoes. But, with solar panels, the government is running fast to cut imports of solar panels from China in the opposite direction. Among the many new trade agreements on the table for the Obama administration is the so-called Trans-Pacific Partnership (TPP), a free-trade agreement among 11 Pacific Rim nations (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam). The TPP is a smaller-scale approach toward free trade begun in response to the so-far-failed Doha Round of global free-trade talks. The rubber meets the road, so to speak, when the topic of running shoes comes up. Maine manufacturer, New Balance, hates the idea. The company currently benefits from tariffs, in some cases reaching more than 60 percent on shoes manufactured in Vietnam. New Balance pays its workers in Maine more than $10/hour, while Vietnamese shoe makers are paying their employees 46¢/hour. Nike would like to import more shoes of its U.S.-designed shoes from Vietnam, so consumers could pay lower prices. On the jobs issue, Nike argues that TPP will create high-paying jobs in the United States for positions from designers to product engineers. Nike and other supporters of TPP argue tariff barriers that save jobs in one industry often make little sense in the context of overall risks and benefits to Americans. Meanwhile, the U.S. government has succeeded in cutting by half imports of solar panels from China. American solar panel manufacturers are cheering. In 2012, the United States imposed duties of roughly 24 to 36 percent on imported panels made from Chinese solar cells after concluding that Chinese solar companies had received unfair subsidies from their government and dumped products on the American market below costs. But the tariffs have upset the domestic solar industry. Many manufacturers have been squeezed to bankruptcy by intense competition from China, while developers, installers, and consumers have been helped by the availability of inexpensive panels. Amid a similar trade case overseas, the Chinese and European Union agreed on a price floor and volume quota for Chinese modules. Further complicating matters, a Justice Department indictment accusing five Chinese military personnel of online attacks against American industrial targets cited SolarWorld as a prominent victim, saying its computers had been broken into, and financial and legal documents stolen, after it filed trade complaints against Chinese manufacturers. And, of course, the Chinese government has complained loudly about the tariffs. You will notice that China is not included in the ongoing TPP talks. Finally, as solar energy becomes more expensive, the world becomes more polluted. Sources: Eric Marting, "New Balance Wants Its Tariffs, Nike Doesn't." Bloomberg BusinessWeek, May 13, 2012, pp. 14-15; Peter Coy, "Mapping the Way to a Global Free-Trade Deal," Bloomberg BusinessWeek, June 20, 2012, pp. 24-26; Diane Carwell and Keith Bradher, "Solar Industry ins Rebalanced by U.S. Pressure on China," The New York Times, July 26, 2014, pp. B1-2; "China Condemns US in Solar Trade Battle," Reuters, July 29, 2014, online. Why does New Balance benefit from the tariffs on imported shoes?

Tariffs prevent the market from being flooded with cheaply made imports.

A good definition of Protectionism would be

taking measures, like tariffs, duties, and barriers/regulations to ensure that your home country goods are more price attractive or available to your own citizens.

Characterization of a product is critical to the international marketer. In Britain, the Supreme Court of Judicature concluded that "Pringles" are potato chips. Why might the court rule in such manner?

All of these choices are correct.

In the case, which of the following could be characterized as a protectionist measure by France?

All of these choices are correct.

International business executives understand the reality that this is a world of tariffs, quotas, and nontariff barriers designed to protect a country's market from intrusion by foreign companies. This activity explores, by means of a mini case, various issues international marketers must grapple with in order to avoid problems and the concept of quotas and the unique issues inherent in the classification of imported goods. To encourage development of domestic industry and protect existing industry, governments may establish such barriers to trade as tariffs and a variety of nontariff barriers. Barriers are imposed against imports and against foreign businesses. Whether or not the barriers are economically logical, the fact is that they still exist. Read the case below and answer the questions that follow. Global Perspective TRADE BARRIERS—AN INTERNATIONAL MARKETER'S MINEFIELD We all know the story about U.S. trade disputes with Japan. Japan has so many trade barriers and high tariffs that U.S. manufacturers are unable to sell in Japan as much as Japanese companies sell in the United States. The Japanese claim that "unique" Japanese snow requires skis made in Japan, and U.S. baseballs are not good enough for Japanese baseball. Even when Japan opened its rice market, popular California rice had to be mixed and sold with inferior grades of Japanese rice. However, the Japanese are not alone; every country seems to take advantage of the open U.S. market while putting barriers in the way of U.S. exports. The French, for example, protect their film and broadcast industry from foreign competition by limiting the number of American shows that can appear on television, the percentage of American songs broadcast on radio, and the proportion of U.S. movies that can be shown in French theaters. Not only do these barriers and high tariffs limit how much U.S. companies can sell, they also raise prices for imported products much higher than they sell for in the United States. Another trade protection tactic even involved Britain's Supreme Court of Judicature, which has finally answered a question that has long puzzled late-night dorm-room snackers: What, exactly, is a Pringle? With citations ranging from Baroness Hale of Richmond to Oliver Wendell Holmes, Lord Justice Robin Jacob concluded that legally it is a potato chip. The decision was bad news for Procter & Gamble U.K., which then owed $160 million in value-added taxes to the state. It is thus good news for Her Majesty's Revenue and Customs—and for fans of no-nonsense legal opinions. In Britain, most foods are exempt from the value-added tax (VAT), but potato chips (known there as crisps) and "similar products made from the potato, or from potato flour" are taxable. Procter & Gamble argued that Pringles are about 40 percent potato flour but also contain corn, rice, and wheat and therefore should not be considered potato chips or "similar products." Rather, they are "savory snacks." The VAT and Duties Tribunal disagreed, ruling that Pringles, marketed in the United States as "potato chips," are taxable. "There are other ingredients," the Tribunal agreed, but a Pringle is "made from potato flour in the sense that one cannot say that it is not made from potato flour, and the proportion of potato flour is significant being over 40 percent." In 2010, the Chinese government began restricting sales of rare earth metals to the United States, Japan, and the European Union. China produces 90 percent of the world's rare earths used in the manufacture of hybrid car batteries, wind turbines, and energy-efficient lighting. Prices exploded. The three governments complained to the World Trade Organization (WTO) that the Chinese quotes gave Chinese firms an unfair advantage on world markets for these high-tech products. The WTO ruled the Chinese restrictions were unjustified and should be eliminated. Barriers to trade, whatever form they take, both tariff and nontariff, are one of the major issues confronting international marketers. Nations continue to use trade barriers for a variety of reasons: some rational, some not so rational. Fortunately, tariffs generally have been reduced to record lows, and substantial progress has been made on eliminating nontariff barriers. And work continues around the world to further reduce these pesky hurdles to peace and prosperity. Sources: Adapted from Todd G. Buchholz, "Free Trade Keeps Prices Down," Consumers' Research Magazine, October 1995, p. 22; Tomas Kellner, "What Gaul!" Forbes, April 28, 2003, p. 52; Jonathan Lynn, "WTO Negotiators to Tackle Obstacles to Farm Deal," Reuters News, January 3, 2008; Adam Cohen, "The Lord Justice Hath Ruled: Pringles Are Potato Chips," The New York Times, June 1, 2009; Tom Barkley, "China Loses WTO Appeal on Raw-Materials," Wall Street Journal, January 30, 2012; "China Loses Appeal of WTO Ruling on Rare Earth Exports." Reuters, August 7, 2014 online. Which of the following is an example of trade barriers imposed by Japan?

All of these choices are correct.

GATT

It began shortly after WWII to reduce tariffs and create an agency to monitor world trade.

OTCA

Its focus is on assisting businesses to be more competitive in world markets and on correcting perceived injustices in trade practices.

World Bank Group

Its goal is to reduce poverty and improve living standards by promoting sustainable growth and investment in people.

IMF

Its objectives are the stabilization of foreign exchange rates and the establishment of freely convertible currencies to facilitate the expansion and balanced growth of international trade.

The case identifies various countries that take advantage of the open U.S. market and impose some level of protectionism. Which countries are identified?

Japan, France, and the U.K.

How did China and the European Union resolve their dispute about imported Chinese solar panels?

They implemented price floors and volume quotas.

As discussed in the video, what ultimately happens when cross-border trade is restricted?

When restrictions are put into place, you end up having higher prices.

Which part of the domestic solar industry would be most helped by tariffs?

manufacturers