International Business Ch. 7

subsidies help domestic producers in two ways:

(1) competing against foreign imports (2) gaining export markets. - Agriculture tends to be one of the largest beneficiaries of subsidies in most countries - The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result. - subsidies can help a firm achieve a first-mover advantage in an emerging industry

three reasons for the rise in such pressures during the 1980s.

1. Japan's success in such industries as automobiles and semiconductors might have been enough to strain the world trading system. 2. the world trading system was strained by the persistent trade deficit in the world's largest economy, the United States. domestic producers steadily lost market share to foreign competitors.resulting unemployment 3. many countries found ways to get around GATT regulations.

What seven main instruments does trade policy use?

1. tariffs 2. subsidies 3. import quotas 4. voluntary export restraints 5. local content requirements 6. administrative policies 7. antidumping duties

General Agreement on Tariffs and Trade (GATT)

1947 multilateral agreement that liberalized trade by eliminating tariffs, subsidies, and quotas. International treaty that committed the signatories to lowering barriers to the free flow of goods across national boarders and led to the World Trade Organization (WTO)

The Uruguay Round

1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (occurred in Uruguay). Up until this round, GATT rules had applied only to trade in manufactured goods and commodities. now rules covered services. took 7 years and implemented 7 new provisions. Created WTO.

Economic Arguments for Intervention

Infant industry argument, promote investment inflows, essential industry argument, import substation

Political Arguments for Intervention

Protecting jobs, national security, protecting consumers, protecting the environment

quota rent

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

tariff rate quota

a lower tariff rate is applied to imports within the quota than those over the quota.

Voluntary export restraint (VER)

a quota on trade imposed by the exporting country, typically at the request of the importing country's government. - One of the most famous historical examples is the limitation on auto exports to the United States enforced by Japanese automobile producers in 1981.

Smoot-Hawley Act

act in 1930s created an enormous wall of tariff barriers against imports to the U.S. The Smoot-Hawley Act had a damaging effect on employment abroad. Other countries reacted by raising their own tariff barriers. U.S. exports tumbled in response, and the world slid further into the Great Depression

administrative trade policies

bureaucratic rules designed to make it difficult for imports to enter a country

Antidumping policies

designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition.

free trade

government does not attempt to restrict what its citizens can buy from or sell to another country. the absence of barriers

Most Favored Nation Clause (MFN)

if a tariff reduction granted to one MFN country, it must be granted to all other MFN countries.

Import quotas

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

Subsidy

is a government payment to a domestic producer. - can be cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms

local content requirement

is a requirement that some specific fraction of a good be produced domestically.

special tariff

levied as a fixed charge for each unit of a good imported

Ad valorem tariffs

levied as a proportion of the value of the imported good.

Political Arguments for Government Intervention

preserving jobs, protecting industries, retaliation, protecting consumers from "dangerous" products, furthering the goals of foreign policy, and advancing the human rights of individuals in exporting countries.

Dumping

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 viewed as a method by which firms unload excess production in foreign markets

embargo

when a country isn't allowed export items. US put an embargo on north korea and cuba

The World Trade Organization

acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on services and the other on intellectual property. WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. craeted in 1995 the WTO has 160 members, including China, which joined at the end of 2001, and Russia, which joined in 2011. took effect in 1995. members account for 95% of world trade. 23 applicants are trying to get in - other countries have to allow & accept applicants. Trade in services, not just goods Telecommunications and financial services Intellectual property rights Better settlement of disputes Reduced agricultural subsidies, textiles protection Criticisms: Labor, the environment, national sovereignty created in the Uruguay Round Vietnam & Cuba are members Iran & Iraq are not members has teeth & strict rules, unlike GATT. Expands trade agreements, antidumping actions, protects agriculture - reduces agricultural subsidies, protects textiles, protects intellectual property (lead to economic growth and increased living standards), Market Access for Nonagricultural Goods and Services (bring down tariff rates), telecommunications and financial services, better settlement of disputes between countries (take action). *#1 goal= getting rid of trade barriers and obtaining FREE TRADE. not really concerned with labor, environment, and national sovereignty. We are currently in the Doha Round (since 2001)

Tariff

tax levied on imports (or exports). - tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods - tariffs also produce revenue for the government. - Government gains b/c the tariff increases government revenues - Domestic Producers gain b/c the tariff gives them some protection against foreign competitors by increasing the cost of imported foreign goods. - Consumers lose because they must pay more for certain imports - tariffs are generally pro-producer and anti consumer. - import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. - Export tariffs are less common than import 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.

the theories of Smith, Ricardo, and Heckscher-Ohlin

tell us that a country's economy may gain if its citizens buy certain products from other nations that could be produced at home because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries. consequences of free trade include both static economic gains (because free trade supports a higher level of domestic consumption and more efficient utilization of resources) and dynamic economic gains (because free trade stimulates economic growth and the creation of wealth).

Economic Argument for Government Intervention

the infant industry argument ( new industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations), strategic trade policy (gov. policy aimed at improving the competitive position of a domestic industry/firm in the world market. 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,a government should use subsidies to support promising firms that are active in newly emerging industries). Essential Industry Argument (protest important national industries). Industrialization argument (agricultural economies need protection to industrialize). promoting investment flows (import restrictions make foreign firms invest locally). Balance of payments Objectives (don't import, produce locally - import substation - and make products for export -export promotion-).