CH7

Define and explain the different types of tariffs.

A tariff (also called a duty) is a tax levied on (internationally) traded products. Export tariffs are levied by the country of origin on exported products; a transit tariff is levied by a country through which goods pass en route to their final destination; import tariffs are levied by the country of destination on imported products. A tariff increases the delivered price of a product, and, at the higher price, the quantity demanded will be less. Import Tariffs. Unless they are optimum tariffs, import tariffs raise the price of imported goods by placing a tax on them that is not placed on domestic goods, thereby giving domestically produced goods a relative price advantage. Tariffs may also serve as a major source of revenue in developing countries. A specific duty is a tariff that is assessed on a per-unit basis; an ad valorem tariff is assessed as a percentage of the value of an item. If both a specific duty and an ad valorem tariff are assessed on the same product, it is known as a compound duty. A tariff controversy concerns the treatment of manufactured exports to industrialized nations. While raw materials frequently enter industrial countries tariff-free, when an ad valorem tariff is applied to manufactured goods, it is generally applied to the total value of the product. Critics argue that the effective tariff on the manufactured portion, i.e., the value-added portion, is higher than the published tariff.

Explain the price control objectives for imposing import restrictions.

Countries may withhold products from international markets in an effort to raise world prices and thus improve export earnings and/or favor domestic customers. (Organization of Petroleum Exporting Companies [OPEC] is a case in point.) The practice of pricing exports below cost, or below their home-country prices, i.e., below their "fair market value," is known as dumping. Most countries prohibit imports of "dumped" products, but enforcement usually occurs only if the product disrupts domestic production. The optimum-tariff theory claims that a foreign producer will lower its prices if the destination country places a tariff on its products. So long as the foreign producer reduces its price by any amount, some shift in revenue goes to the importing country, and the tariff is deemed an optimum one.

What are trade protectionism and the reasons that managers should understand it?

Protectionism refers to those government restrictions and incentives that are specifically designed to help a country's domestic firms compete with foreign competitors at home and abroad. The rationale for such policies can be economic or noneconomic in nature. Whenever governments choose to impede the flow of imports and/or encourage the flow of exports, they simultaneously provide direct and/or indirect subsidies for their domestic firms.

Explain the rationale for and problems of making the infant industry argument for trade protectionism work as intended.

First presented by Alexander Hamilton in 1792, the infant-industry argument holds that a government should temporarily shield emerging industries in which the country may ultimately possess a comparative advantage from international competition until its firms are able to effectively compete in world markets. 1. Underlying Assumptions. The infant-industry argument presumes that the initial output costs for a small-scale industry in a given country may be so high as to make its output noncompetitive in world markets. Eventual competitiveness will result from movement along the learning curve plus the efficiency gains from achieving the economies of large-scale production. Risks in Designating Industries. Although it's reasonable to expect production costs to decrease over time, there is a risk that costs will never fall enough to create internationally competitive products. Two basic problems associated with this argument are the assumptions that (i) governments can in fact identify those industries that have a high probability of success and (ii) firms within those industries should receive government assistance. Infant-industry protection requires some segment of the economy (typically local consumers) to incur the initial higher cost of inefficient local production. Ultimately, the validity of the argument rests on the expectation that the future benefits of an internationally competitive industry will exceed the costs of the associated protectionist measures.

List and explain the nontariff barriers that directly limit the quantity of goods traded.

Governments use a variety of nontariff barriers to directly affect the quantity of imports and exports. When the quantity of imports is limited, the resulting shift in the supply curve means that the equilibrium price will then be higher. Quotas. "Buy Local" Legislation. Standards and Labels. Specific Permission Requirements. Administrative Delays. Reciprocal Requirements. Restrictions on Services.

Explain the rationale and shortcomings of developing countries' use of import restrictions to promote industrialization.

Import restrictions may be levied as a means to try to persuade other countries to lower their import barriers. The danger, however, is that each country will, in turn, retaliate by escalating its own restrictions. To successfully use restrictions as a bargaining tool requires that they be (i) believable and (ii) important to the targeted parties.

Compare import substitution with export-led development policies.

Import substitution represents an economic development strategy that relies on the stimulation of domestic production for local consumption by erecting barriers to imported goods. If the protected industries do not become globally competitive, however, local customers will continually be penalized by high prices or higher taxes. On the other hand, export-led development encourages economic development by harnessing a country-specific advantage (e.g., low labor costs) and building a vibrant manufacturing sector through the stimulation of exports. In reality, when effectively crafted, import substitution policies eventually lead to the possibility of export promotion as well.

Describe the non-economic rationales for government intervention in the free movement of trade? What problems may hinder achievement of their objectives?

Noneconomic rationales include a. Maintaining essential industries Protecting an inefficient industry, however, will lead to higher costs and possibly political consequences as well. b. Promoting acceptable practices abroad However, retaliation often renders such protectionist measures ineffective. c. Maintaining or extending spheres of influence Further, trade restrictions may coerce governments to take certain political actions or punish firms whose governments do not comply. d. Preserving national culture Consumers still seek out the best products and services for the least price.

Define and explain the non tariff barriers that directly affect prices in order to limit trade.

Nontariff barriers (NTBs) represent administrative regulations, policies, and procedures, i.e., quantitative and qualitative barriers that directly or indirectly impede international trade. Subsidies. Aid and Loans. Customs Valuation. Other Direct Price Influences.

Why might trade protectionism to reduce unemployment not fully work as planned?

Persistent unemployment pushes many groups to call for protectionism; one of the most effective is organized labor. By limiting imports, local jobs are retained as firms and consumers are forced to purchase domestically produced goods and services. However, unless the protectionist country is relatively small, such measures usually do little to limit unemployment. On the other hand, they may result in a decline in export-related jobs because of (i) price increases for components or (ii) lower incomes abroad. Further, such measures are likely to lead to retaliation unless either the protectionist or the affected country is relatively small. Thus, governments must carefully balance the costs of higher prices with the costs of unemployment and the displaced production that would result from freer trade when enacting such measures. Protectionism may also increase the prospect of retaliation.

What are the conflicting results of trade policy?

While governments intervene in trade in order to attain economic, social, and/or political objectives, they also pursue political rationality when they do so. Officials enact those trade policies they feel will best protect their nations and citizens—and perhaps their personal political longevity. However, aiding struggling constituencies without penalizing those who are well off is often impossible. A. The Role of Stakeholders Proposals for trade regulation reform often spark fierce debate among competing parties, also known as stakeholders. 1. The Role of Consumers. Consumers generally purchase products with little thought as to where the product was produced. Import barrier costs are often spread out so that the effect is not noticed by the consumer.