IB Chapter 7

Economic Arguments for Intervention: Strategic Trade Policy H

- Basically the new trade theory (countries may predominate in the export of certain products because of first mover advantage). - A gov. should use subsidies to support promising firms in newly emerging industries to have a chance of first mover advantage which could raise national income. - EX: U.S supported Boeing in 50s and 60s and they had first mover advantage. Same w/ Japans support of their liquid crystal display industry (invented in U.S but Japanese invested in industry research and captured first-mover advantage). - Still benefits countries to help domestic firms in an industry in which another country has already captured first-mover advantage. Ex: Airbus is splitting the market with Boeing even though it was started much later because of $18 billion subsidy.

Political Arguments for Intervention: Protecting National Security H

- Certain industries need protecting for national security (ex: aerospace, advanced electronics, semiconductors). - For Trump Admin's 2018 announcement of tariffs on foreign steel & aluminum, national security was cited as the primary justification.

Political Arguments for Intervention: Protecting Human Rights H

- Governments use trade policies to improve human rights policies of trading partners. - In 2012 U.S said they would ease trade sanctions against Myanmar in response to democratic reforms.

Political Arguments for Intervention: Protecting Jobs and Industries H

- Need to protect local firms from foreign ones. - Competition is unfair when foreign producers are subsidized. - Complaint w/ WTO against China for their auto part procedures in 2012. - Critics argue criticism of unfair competition is overstated for political reasons: (Bush's foreign steel import tariffs benefitted firms in states he needed to win for reelection in 2004).

Some people criticize the WTO for H

- Not enough antidumping policies - The high tariff barriers on agricultural products - Protection of intellectual property - High tariffs on nonagricultural goods -

In 1997 WTO got countries to do two major things H

- Open their telecommunication markets to competition. - Liberalize cross-border trade and FDI in financial services (banking, securities, insurance)

Economic Arguments for Intervention: The Infant Industry Argument H

- Proposed by Alexander Hamilton in 1792. - Many developing countries have comparative advantage but cannot initially Governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition. - Criticism: In many cases, protection has done little more than foster the development of inefficient industries that have little hope of competing in the world market.

Political Arguments for Intervention: Protecting Consumers H

- Sometimes banning imports protects consumers. - In 2003 several countries, including Japan and South Korea, decided to ban imports of American beef after a single case of mad cow.

It's probably in the best long-run interests of the business community to encourage the government to aggressively promote greater free trade by:

- Strengthening the WTO - Open protected markets to imports and FDI

Who gains from import tariffs? Who loses? HH

- The government because it increases their revenue. - Domestic producers because they're protected from foreign competition. -Consumers lose because they have to pay more for certain imports.

Political Arguments for Intervention: Retaliating H

- The threat to intervene in trade policy can be used as a bargaining tool to help open foreign markets and force trading partners to "play by the rules." - U.S has used threat of punitive trade sanctions to get Chinese gov. to enforce intellectual property laws.

What are two reasons that tariffs are placed on imports? HH

- To protect domestic producers from foreign competition by raising the price of imported goods. - To produce revenue for the government.

How do trade barriers effect a firm's strategy? L/H

- Trade barriers constrain a firm's ability to disperse its productive activities to other countries. - A firm's response to tariffs and quotas may be to set up production facilities in that country. - To conform to local regulations, a firm may have to locate more production activities in a given market than it would otherwise. - Even without trade barriers, a firm may want to locate some production activities in another country to avoid future barriers. - Threat of antidumping actions limit firms ability to use aggressive pricing to gain market share.

Political Arguments for Intervention: Furthering Foreign Policy Objectives H

- Trade deals to build relationships with other countries or to punish "rogue states" that don't abide by international law. - After the UN Coalition defeated Iraq in the 1991 Gulf War, they places extensive trade sanctions on them. - Trade sanctions against many countries to get them to stop/limit nuclear programs.

Developing of the world trade system H

- World trade as a gov. policy first embraced in Great Britain in 1846. - 1930s U.S Smoot-Hawley act erected an enormous wall of tariff barriers - Other countries respond by raising their own tariff barriers & U.S exports tumble. - After WW2 GATT is established (1947) - GATT's goal is to liberalize trade by eliminating tariffs, subsidies, import quotas etc. - 1990s protectionism increases. Partially bc of success of Japan which strained the world trading system. Partially bc of trade deficit in U.S. Also many countries found ways to get around GATT. Bilateral voluntary export restraints circumvented GATT bc neither importing or exporting country complained to GATT. - In 1986 GATT members meet for the Uruguay round, extending GATT to cover trade in services not just product. - WTO is created and encompasses GATT + provisions in services & intellectual property. - WTO has 164 members, which account for 98% of world trade.

Two ways that subsidies help domestic producers: HH

1. Competing against foreign imports 2. Gaining export markets

The 3 drawbacks of government intervention in international trade

1. Intervention tends to protect the inefficient. 2. Intervention may invite retaliation and tigger a trade war. 3. Intervention is unlikely to be well executed, given the opportunity for such policy to be captured by special-interest groups.

The two objectives of export tariffs HH

1. Raise revenue for the government. 2. Reduce exports from a sector, usually for political reasons.

What provisions to GATT did the Uruguay provision contain? H

1. Tariffs on industrial goods reduced by > 1/3 & tariffs scrapped on > 40% of manufactured goods. 2. Average tariff rates imposed by developed nations reduced by < 4% of value. 3. Agricultural subsidies reduced. 4. GATT extended to cover some services. 5. GATT extended to provide enhanced protection for intellectual property. 6. Barriers on trade in textiles were to be significantly reduced over 10 years. 7. The WTO was to be created to implement GATT.

When have local content requirements commonly been used by: 1. developing countries? 2. developed countries? HH

1. To shift their manufacturing base from the simple assembly of products who's parts are manufactured elsewhere into the local manufacture of component parts. 2. To try to protect local jobs and industry from foreign competition.

If a domestic producer believes a foreign firm is is dumping production in the U.S market, it can file a petition with: HH

1. the Commerce Department 2. International Trade Commission.

Import quota HH

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

Subsidy HH

A government payment to a domestic producer. Subsidies take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.

Export Ban HH

A policy that partially or entirely restricts the export of a good.

Voluntary Export Restraint HH

A quota on a trade imposed by the exporting country, typically at the request of the importing country's government. EX: In 2012 Brazil imposed voluntary export restraints on vehicles shipped from Mexico to Brazil.

Local Content Requirement HH

A requirement that some specific fraction of a good be produced domestically (usually a percentage of component parts, or of the value of the product)

Tariff (Specific, Ad Valorem) HH

A tax levied on imports (or exports). Specific: Imposed as a fixed charge for each unit of good imported. Ad valorem: Imposed as a proportion of the value of the imported good.

Export Tariff The goal is to: HH

A tax placed on an export of a good. discriminate against exporting in order to ensure a sufficient supply of a good within a country.

Countervailing duty HH

An additional tariff placed on products priced below fair market value due (to combat dumping).

Administrative Trade Policies HH

Bureaucratic rules designed to make it difficult for imports to enter a country.

How are import quotas enforced? HH

By issuing import licenses to a group of individuals or firms. The U.S has a quota on cheese imports lol.

How are government subsidies paid for? HH

By taxing people and corporations.

Management Focus Protecting U.S Magnesium L/H

CHP 7 PG 217

what are multilateral/bilateral trade agreements designed to do? H

Capture gain from trade beyond those agreements currently attainable under WTO treaties. This is allowed but countries must notify the WTO.

Tariff Rate Quota HH

For imports that exceed a certain quota, a higher tariff rate is applied.

Domestic Policies H

Further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special-interest groups within the economy, which will distort it to their own ends (Like the EU's support of CAP which benefitted rich farmers and thus benefitted politicians).

Buy America Act of 1933 (local content requirement) HH

Government agencies must give preference to American products when pitting contracts for equipment out to bid unless foreign products have a significant price advantage. The law specifies a product as "American" if 51% of materials by value are produced domestically.

Doha H

In 2001 WTO started a new round of talks between member states aimed at further liberalizing global trade. The goal was to cut tariffs, phase out agricultural subsidies, reducing investment barriers, and limiting use of antidumping laws.

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. EX: HH

In some studies, the U.S import quotas on sugar have caused the price of sugar in the U.S to be as much as 40% greater than the world price. This has raised profit for U.S sugar companies who lobby politicians to keep the import quotas.

Japanese administrative trade policies HH

Japan's formal tariff and non-tariff barriers are among the lowest in the world but their administrative trade policies make up for it and make it hard for foreign firms to compete. Ex: they set extreme vehicle parts standards that don't exist anywhere else.

Relation and trade war H

Krugman argues that strategic trade policy leads to trade wars which leave all countries involved worse off than if a hands-off approach had been adopted.

Dumping HH

Selling goods in a foreign market at below their costs of production or below their "fair" market value.

Import tariffs are paid by: Export tariffs are paid by: HH

The importer The exporter

Do import Tariffs help or hurt an economy HH

They tend to cause an inefficient utilization of resources because countries start producing products at home that could be produced more efficiently abroad. They also impose significant cost for domestic consumers.

Why would companies dump in foreign markets? HH

To drive indigenous competitors out of their market. Once this is achieved, the foreign competitor can raise their prices.

T/F Subsidizing firms in industries which the world market is not large enough to profitably support more than a few firms can help a firm achieve first mover advantage. HH

True

T/F In practice, many subsidies are not that successful at increasing the international competitiveness of domestic producers. HH

True They tend to protect the inefficient and promote excess production.

Antidumping Policies HH

designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition.