IBUS 380 Chapter 7
Two Types of Arguments for Government Intervention
*1. Political* - are concerned with protecting the interest of certain groups within a nation (benefit producers, hurt consumers) - achieving a political objective such as protecting the environment or human rights *2. Economic* - concerned with boosting the overall wealth of a nation (benefit producers and consumer)
Quota Rent
- is the extra profit producers make when supply is artificially limited by an import quota.
Multilateral and Bilateral Trade Agreements
- reciprocal trade agreements between two or more partners - in response to the apparent failure of the Doha Round to progress, many nations started using this type of agreement
Nations NOMINALLY committed to *Free Trade* ten to intervene in international trade
- to protect the interests of politically important groups - promote the interests of key domestic producers
Protecting Consumers
- type of political argument for government intervention - argue for regulations to protect consumers from unsafe products - indirect effect from consumer protection regulations are they limit or ban importation of products
Two Conclusions of the Effect of Import Tariffs
*1. Tariffs are pro-producer and anti-consumer* - tariffs protect producers from foreign competitors, restricting supply and raising domestic prices *2. Import Tariffs reduce the overall efficiency of the world economy* - tariff encourages domestic firms to produce products at home that could be produced more efficiently abroad - inefficient utilization of resources
4 Issues of the Agenda of the WTO
*1. antidumping policies* - vague definition of what constitutes "dumping" has proved to be a loophole that many countries are exploiting to pursue protectionism - sectors include: metal industries, chemicals, plastics, and machinery and electrical equipment *2. high level of protectionism in agriculture* - high tariff barriers and subsidies introduced distortion into production of agricultural products and international trade, raising consumer prices, reducing volume of products, and encouraging overproduction *3. lack of strong protection for intellectual property rights in many nations* 4. continued high tariff rates on non agricultural goods and services in many nations - developed nations have average tariff rates of 3.8% - certain imports still have high tariffs, which limits market access and economic growth - WTO goal is to reduce tariff rates to zero
Tariff Rate Quota
- a lower tariff rate is applied to imports within the quota than those over the quota - hybrid of a quota and a tariff
Export Ban
- a policy partially or entirely restricting the exporting of a good
Voluntary Export Restraint (VER)
- a quota on trade imposed by the exporting country at the request of the importing country's government - agree on by foreign producers because they fear more damaging punitive tariffs or import quotas might follow - " seen as a way to make the best of a bad situation" by appeasing protectionist pressures in a country - raise the domestic price of an imported good
Infant Industry Argument
- a type of economic arguments for intervention - is the oldest economic argument for government intervention (proposed in 1792 by Alexander Hamilton) - *states* that new industries in developing countries must be temporarily protected from international competition (unde the WTO) - *help* new industries reach a position where they can compete on world markets with the firms of developed nations. - *support comes* through government financial assistance such as tariffs, import quotas, subsidies
World Trade Organization (WTO)
- acts as an umbrella organization that encompasses the GATT along with two sister bodies: 1. General Agreement on Trade in Services (GATS) 2. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) - *taken over* the responsibility for arbitrating trade disputes and monitoring the trade policies of member countries - *operates* on the basis of consensus in area the of dispute settlement (member countries cannot block adoption of arbitration reports)
Factors that Affect the Impact Tariffs have on Consumers, Government, and Domestic Producers
- amount of the tariff - importance of the imported good to domestic consumers - number of jobs saved in the protected industry
If a Domestic Industry Lacks the Capacity to Meet Demand
- an *import quota* can raise prices for both the domestically produced and the imported good
Countervailing Duties
- another name for antidumping duties - duties *represent* a special tariff that can be fairly substantial and stay in place for up to 5 years
Administrative Policy
- are bureaucratic rules designed to make it difficult for imports to enter a country - japanese are masters of this trade barrier
Antidumping Policies
- are designed to punish foreign firms that engage in dumping - *objective* is to protect domestic producers from unfair foreign competition - file a petition to one of the two government agencies: (1) Commerce Department and (2) International Trade Commission (ITC)
World Trade Organization (TO DATE)
- by 2016, the WTO had 164 members - WTO members account for 98% of world trade - *since formation* WTO has remained at the forefront of efforts to promote global free trade - WTO has not been able to get agreements to further reduce barriers to international trade and trade and investments
When was Free Trade First Embraced and by Who
- by Great Britain in 1846
How Government Intervenes in International Trade
- by restricting imports of goods and services into their nation while adopting policies that promote domestic production and exports *done to protect domestic producers*
World Trade Organization (as GLOBAL POLICE)
- first 2 decades in the life of the WTO suggest that its policing and enforcement mechanisms are having a positive effect
Krugman Argument Against Strategic Trade Policy
- he believes that the strategic trade policy is aimed at establishing domestic firms in a dominant position in a global industry - this is a *beggar-thy-neighbor* policy that boosts national income at the expense of other countries - these policies will provoke retaliation, leading to trade wars between two interventionist governments leaving all countries involved worse off - *krugman concludes* that strategic trade policy is almost certain to be captured by special-interest groups which will distort it to their own ends
Main Gain of Subsidies
- help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a few firms *help firms achieve a first-mover advantage in an emerging industry*
General Agreement on Tariffs and Trade (GATT)
- international treaty that committed signatories to lowering barriers to the free flow of goods across national borders - found in 1947, until superseded by WTO (World Trade Organization) - made up of 120 nations - modern international trading systems are based on the GATT - tariff reduction was spread over 8 rounds - was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas
Import Quota
- is a direct restriction on the quantity of a good that can be imported into a country - enforced by issuing import licenses to a group of individuals or firms - benefit domestic producers by limiting import competition and negatively impact consumers
Subsidy
- is a government payment to a domestic producer *include*: - cash grants, low interest loans, tax breaks, and government equity participation in domestic firms - revenues are generated from tax - encourage over production, inefficiency, and reduce trade - agriculture is the *largest beneficiaries* of subsidies - *not successful at increasing international competitiveness of domestic producers
Tariff
- is a tax levied on imports (or exports) - *placed on imports* to protect domestic producers from foreign competition by raising the price of imported goods - increases government revenue, until the income tax was introduced
Export Tariff
- is a tax placed on the export of a good - *goal* is to discriminate against exporting in order to ensure that there is sufficient supply of a good - are relatively rare, bc most countries encourage exporting
Smoot-Hawley Act
- is aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products - erected an enormous wall of tariff barriers, damaging effects on employment abroad - enacted in 1930 by the U.S. Congress
Protecting Jobs and Industries
- most common political argument for government intervention - is necessary for protecting jobs and industries from unfair foreign competition - *competition is viewed unfair* when producers in an exporting country are subsidized by their government - *critics say unfair competition* claims are overstated for political reasons
Strategic Trade Policy
- policy aimed at improving the competitive position of a domestic industry or firm in the world market - suggests that *governments* should use subsidies to support promising firms that are active in newly emerging industries
Free Trade
- refers to the absence of barriers to the free flow of goods and services between countries. - a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country
Local Content Requirement (LCR)
- requirement that some specific fraction of a good be produced domestically - can be expressed either in physical terms or in value terms - used by *developing countries* to shift their manufacturing base from simple assembly of products whose parts are manufactured elsewhere into local manufacture of components parts - used by *developed countries* to try to protect local jobs and industry from foreign competition - protects domestic producers by limiting foreign competition (do not benefit consumers)
Dumping
- selling goods in a foreign market at below their costs of production or selling goods in a foreign market at below their fair market value - *enables* firms to unload excess production in foreign markets *result of predatory behavior* - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices
Trade Patterns are Determined by
- the relative productivity of different factors of production in different countries - countries will specialize in products they can make most efficiently and import products they can produce less efficiently
Retaliation
- type of political argument for government intervention - argue that governments should use threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game" - government intervention may liberalize trade and bring with it resulting economic gains - risky strategy, can result in high trade barriers and an economic loss if the government does not back down
Furthering Foreign Policy Objectives
- type of political argument for government intervention - argue that governments sometimes use trade policy to support their foreign policy objectives - *allows* for a government to grant preferential trade terms to a country it wants to build strong relations with - *trade policy* can be used to pressure or punish "rogue states" that do not abide by international law or norms
Protecting National Security
- type of political argument for government intervention - argue that it is necessary to protect certain industries because they are important for national security - *defense related industries* get this kind of attention
Protecting Human Rights
- type of political argument for government intervention - is an important element of foreign policy for many democracies - governments use trade policies to try to improve human rights policies of trading partners
Who Losses from Tariffs
1. *consumers* - tariffs causes them to pay more for certain imported items
Who Gains from Tariffs
1. *government* - tariffs increases government revenues 2. *domestic producers* - tariffs offers them some protection against foreign competitors by increasing the cost of imported foreign goods
Two Types of Tariffs
1. *specific tariffs* - tariff levied as a fixed charge for each unit of good imported. 2. *ad valorem tariff* - tariff levied as a proportion of the value of the imported good
Consequences of Free Trade include
1. *static economic gains* - free trade support a higher level of domestic consumption and more efficient utilization of resources 2. *dynamic economic gains* - free trade stimulates economic growth and the creation of wealth
Two Ways Subsidies Help Domestic Producers
1. Compete against Foreign Imports 2. Gain Export Markets
Two Arguments for Strategic Trade Policy
1. Government can help raise national income when a domestic firm gains first-mover advantages (over a foreign firm) 2. Government may intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages
Two Criticisms of Infant Industry Argument
1. Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient 2. Assumes firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market
The Uruguay Round of GATT Negotiations
1. Tariffs on industrial goods were to be reduced by more than 1/3 and tariffs were to be scrapped one more than 40% of manufactured goods 2. Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4% of value 3. Agricultural subsidies were to be substantially reduced 4. GATT fair trade and market access rules were to be extended to cover a wide range of services 5. GATT rules were to be extended to provide enhanced protection for patents, copyrights, and trademarks 6. Barriers on trade in textiles were to be significantly reduced over 10 years 7. WTO was to be created
