International Business Chapter 6 (Trade Protectionism)

Non-economic rationales

maintaining essential industries promoting acceptable practices abroad maintaining or extending spheres of influence preserving national culture

Overcoming market imperfections

most countries offer potential exporters many business development services, such as market information, trade expositions, and foreign contacts these sorts of subsidies are more justifiable than tariffs because they seek to overcome, rather than create, market imperfections Aid and loans (tied - untied)

Dealing with governmental trade influencers

move abroad seek other market niches create greater efficiency or superior products try to get governmental protection

Role of stakeholders

proposed policies on trade spark debate among stakeholders that would be affected stakeholders include workers, owners, suppliers, and local politicians consumers don't care, because they seek the best product in the lowest price without knowing or caring for the origin

How other countries react

retaliation / counter-attack

Specific permission requirements

An import or export license requires that firms secure permission from government authorities before conducting trade transactions such procedures directly restrict trade when permission is denied and indirectly restrict trade because of the cost, time, and uncertainty involved int he process

Agricultural subsidies

Common in order to ensure adequate good supply, although there are also political reasons A big issue for developing countries, which cannot compete with subsidized agricultural products; worse, surplus production is exported at low prices

Developing an Industrial Base

Countries promote the industrialization argument because it: 1. brings faster growth than agriculture 2. brings in investment funds (if import restrictions keep out foreign-made goods, foreign companies may invest to produce in the restricted area) 3. diversifies the economy (economy is not based only to agricultural productions that fluctuates due to uncontrollable factors) 4. creates growth in manufactured goods (demand for primary products grows more slowly) 5. reduces imports and promotes exports (import restrictions boast local production of (imported) products --> supporting exporting industries leads to economic growth 6. helps the nation-building process (industrialization helps countries build infrastructure, advance rural development, and boost workforce skills)

Instruments of Trade Control

Directly (limit the amount that can be traded) Indirectly (Affect the amount traded by directly influencing the prices) Tariffs (also called duties) are taxes levied on (internationally) traded product Non-tariff barriers (NTBs) represent administrative regulations, policies and procedures, i.e., quantitative and qualitative barriers, that directly/indirectly impede trade.

Comparable access argument or fairness

Domestic producers may be disadvantaged if their access to foreign markets is less than foreign producers' access to their market Countries may impose trade restrictions to improve their relative competitive positions through: comparable access to foreign markets, as foreign companies/industries have in domestic markets BUT: 1. Tit for tat market access can lead to restrictions that may deny one's own consumers lower prices 2. governments would find it impractical to negotiate and monitor separate agreements for each of the many thousands of different products and services that might be traded

Price Control Objectives

Export restrictions )may lead to smuggling the development of alternative technology, substitution or copyright infringement Import restrictions ( to prevent dumping to put domestic Dumping refers to practice of pricing exports below cost, or below their home-country prices, i.e. below their fair market value (goals is to build market abroad) Optimum tariff theory: a foreign producer will lower its prices if the destination country places a tariff on its products (so long as the price is reduced by any amount, some shift in revenue goes to the importing country, mostly, this is the case, but it is difficult to predict exporters' behavior

Protectionism

Governmental policies that: affect the ability of foreign producers to compete in your home market limit or enhance your company's ability to sell abroad or acquire needed foreign supplies government restrictions and incentives specifically designed to help a country's comestic firms compete with foreign competitors at home and abroad

Maintaining or extending spheres of influence

Governments provide assistance and encourage imports from countries that join a political alliance or vote a preferred way within international bodies Country's trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not

Adjustment of balance-of-trade

If deficit occurs, the two options can affect country's competitive position are: 1. depreciating or devaluing its currency, which makes basically all of its products cheaper in relation to foreign products 2. relying on fiscal and monetary policy to bring about lower price increases in general than those in other countries BUT Both of these options take time. They make both foreign essentials and foreign luxury products more expensive

Promoting acceptable practices abroad

Import trade controls can be used: to promote changes in foreign countries' political policies or capabilities as a foreign policy weapon to pressure governments to alter their stances on a variety of issues (human rights, environmental protection)

Buy legal legislations

Laws that are intended to favor the purchase of domestically sources products over imported products

Preserving national culture

Limit foreign products and services in certain sectors prohibit exports of art and historical items deemed important to national heritage

Quantity Controls (Non-tariffs)

Quota: A numerical limit on the quantity of a product that may be imported or exported in a given period of time Import quotas: Normally raise prices by limiting supply and eliminating incentive to increase sales by lowering prices Export quotas: To ensure adequate domestic supply, prevent depletion of natural resources or to raise Buy local legislation - for government agencies Restriction on services - governments limit entry into service professions to ensure practice by qualified personnel Standards and labels Administrative delays

Tariffs

Tariffs --> taxes levied on (internationally) traded products, include export tariff: levied by the country of origin on exported products transit tariffs: levied by a country through which goods pass en route to their final destination import tariffs, 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 specific tariff: per unit based ad valorem: based on the total quantity Compound tariff: combination of specific and ad valorem

Maintaining essential industries

The essential industry argument protects essential industries so the country is not dependent on foreign supplies during war Countries must determine which industries are essential, consider costs and alternatives, consider political consequences.

Protecting Infant Industries

The infant industry argument --> government protection of import competition is necessary to help certain industries evolve from high-cost to low-cost production and production becomes more competitive over time because of increased economies of scale and greater work efficiency BUT: 1. However governments identify those industries with high probability of success? (may deter managers from adopting the innovations needed to compete globally and to provide their own consumers with high-quality products at a low price) 2. Who should bear the cost? (When local production is still inefficient, consumers pay higher prices for the protected products or taxpayers pay for subsidies.

As a bargaining tool

The threat or imposition of import restriction may be a retaliatory measure for persuading other countries to lower their import barriers To use restrictions successfully as a bargaining tool, you need to be very careful in targeting the products you threaten to restrict: believability: either you have access to alternative sources for the product or your consumers are willing to do without it Importance: exports of the product you're restricting are significant to certain parties int he producer country- parties influential enough to prompt changes int heir own country's trade policy

Economic Relationships with other countries

Trade Controls can be used: 1. adjustment of balance-of trade (to improve the balance of payments, to gain fair access to foreign market) 2. comparable access argument or fairness 3. as a bargaining tool 4. to control prices (dumping and optimum-tariff theory)

Fighting unemployment

Unemployed are the most effective pressure group High prospect of retaliation: loss of import-handling jobs cost increase for industries benefiting from lower-price imports may decrease exports because of lower incomes abroad and therefore, negative effects on domestic earning and employment Trade-offs: Costs vs. benefits from employment Not only an economic issue, but a social as well

Quota

a numerical limit on the quantity of a product that may be imported or exported in a given period of time import quotas: normally raise prices by limiting supply and eliminating incentive to increase sales by lower prices export quotas: to ensure adequate domestic supply, prevent depletion of natural resources or to raise voluntary export restraints (VERs) are negotiated limitation of exports from one country to another and that may result in higher prices to customers Embargo: represents an outright ban on imports from or exports to a particular country.

Restrictions on services

a. essentiality. countries consider certain services industries to be essential because they serve strategic purposes or provide social assistance to citizens b. Not for profit services: Mail, education, and hospital health services are often not for profit services and governments may preclude foreign firms from competing in these areas c. standards: governments may limit foreign entry into particular service professions in order to assure the practitioners are qualifies d. immigration: government regulations often require that an organization, whether domestic or foreign, demonstrate that the skills needed for a particular job are not available locally before hiring a foreigner.

Tactics for dealing with import competition

convince decision makers of the merits of particular policies involve the industry and stakeholders prepare for changes int he competitive environment

Administrative delays (intentional)

create uncertainty and raise cost

Other Direct Price Influencers

customs valuation: determining the true value and/or origin of traded products difficult and customs officials may make arbitrary decisions other direct price influences: special fees (e.g. custom clearance), deposits (e.g. in advance of shipments), minimum price levels (for products to be sold)

Objectives to influence trade

economic, social, political

Economic rationales

fighting unemployment protecting infant industries promoting industrialization improving comparative position

Nontariff barriers: Direct price influencers

subsidies --> direct of indirect financial assistance from governments to their domestic firms agricultural subsidies overcoming market imperfections valuation problems

standards and labels

technicalities add costs country's origin difficult to determine official purpose to protect domestic consumers: standards argues to protect safety and health of domestic population others argues it is to protect domestic producers - reputation damage to rejected products ex: nutritional facts on packaging