Chapter 7

Protecting Consumers

- protecting consumers from unsafe products is also be an argument for restricting imports -often involves limiting or banning the import of certain products

Protecting Jobs and Industries

- the most common political reason for trade restrictions -typically the result of political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than the consumers who will eventually pay the costs

Who benefits from import quotas and voluntary export restraints?

-Import quotas and voluntary export restraints benefit domestic producers by limiting import competition -but they raise the prices of imported goods for consumers

The world trading system came under strain during the 1980s and early 1990s because:

-Japan's economic success strained what had been more equal trading patterns -persistent trade deficits by the U.S caused significant problems in some industries and political problems for the government -many countries found that although GATT limited the use of tariffs, there were many other forms of intervention that had the same effect that did not technically violate GATT

7 main instruments of trade policy:

-Tariffs - Subsidies -Import quotas -Voluntary export restraints -Local content requirements -Antidumping policies -Administrative policies

Tariffs

-increase government revenues -provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods -force consumers to pay more for certain imports So, tariffs are pro-producer and anti-consumer, and reduce the overall efficiency of the world economy

Dumping

-selling goods in a foreign market below their cost of production, or -selling goods in a foreign market at below their "fair" market value --a way for firms to unload excess production in foreign markets --may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits

Domestic Policies

Governments can be influenced by special interest groups -a government's decision to intervene in a market may appease a certain group, but not necessarily the support the interests of the country as a whole

Retaliation and War

Krugman - 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 (a trade war could leave both countries worse off)

Import Quotas

a direct restriction on the quantity of some good that may be imported into a country

Subsidy

a government payment to a domestic producer Subsidies help domestic producers -compete against low-cost foreign imports -gain export markets Consumers typically absorb the costs of subsidies

Tariff Rate Quotas

a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota

Tariff

a tax levied on imports that effectively raises the cost of imported products relative to domestic products Specific tariffs-are levied as a fixed charge for each unit of a good imported Ad valorem-tariffs are levied as a proportion of the value of the imported good

Administrative trade polices

bureaucratic rules that are designed to make it difficult for imports to enter a country -These polices hurt consumers by denying access to possibly superior foreign products

Government Intervention: Economic Arguments

concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers) -The infant industry argument -Strategic trade policy

Government Intervention: Political Arguments

concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) -protecting jobs -protecting industries deemed important for national security -retaliating to unfair foreign competition -protecting consumers from "dangerous" products -furthering the goals of foreign policy -protecting the human rights of individuals in exporting countries

Local Content Requirement

demands that some specific fraction of a good be produced domestically -can be in physical terms or in value terms -Local content requirements benefit domestic producers and jobs, but consumers face higher prices

Anitdumping Policies

designed to punish foreign firms that engage in dumping -the goal is to protect domestic producers from "unfair" foreign competition U.S. firms that believe a foreign firm is dumping can file a complaint with the government -if the complaint has merit, antidumping duties, also known as countervailing duties may be imposed

New Trade Theorists

government intervention in international trade is justified classic trade theorists disagree Some new trade theorists believe that while strategic trade theory is appealing, it may not be applicable in practice - they suggest a revised case for free trade 2 situations where restrictions on trade may be inappropriate -Retaliation -Domestic Policies

Protecting Human Rights

governments can use trade policy to improve the human rights policies of trading partners -unless a large number of countries choose to take such action, however, it is unlikely to prove successful Some critics have argued that the best way to change the internal human rights of a country is to engage it in international trade -the decision to grant China MFN status in 1999 was based on this philosophy

National Security

governments protect certain industries such as aerospace or advanced electronics because they are important for national security -this argument is less common today than in the past

Voluntary Export Restraints

quotas on trade imposed by the exporting country, typically at the request of the importing country's government

The Infant Industry Argument

suggests that an industry should be protected until it can develop and be viable and competitive internationally -this has been accepted as a justification for temporary trade restrictions under the WTO However, this argument has been criticized because -it is useless unless it makes the industry more efficient -if a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds

Strategic Trade Policy

suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages -also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

Quota Rent

the extra profit that producers make when supply is artificially limited by an import quota

Furthering Foreign Policy Objectives

trade policy can be used to support foreign policy objectives preferential trade terms can be granted to countries that a government wants to build strong relations with rogue states that do not abide by international laws or norms can be punished However, it might cause other countries to undermine unilateral trade sanctions The Helms-Burton Act and the D'Amato Act, have been passed to protect American companies from such actions

Retaliation

when governments take, or threaten to take, specific actions, other countries may remove trade barriers can be a risky strategy if threatened governments don't back down, tensions can escalate and new trade barriers may be enacted

The Uruguay Round (1986)

Services and Intellectual Property -Trade issues related to services and intellectual property and agriculture were emphasized 2. The World Trade Organization -The WTO was established as a more effective policeman of the global trade rules -The WTO encompassed GATT and the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)