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BA CORE 06 Lesson 3

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Divine Word College of Legazpi

SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY


Legazpi City

ACCTGEd 20
International Business and Trade

2nd Sem-2021-2022

Lesson 3 – Trade and Investment Policies

Learning Objectives: At the end of the lesson, the student is expected to:

1. Understand the effects of global links in trade and investment on


policymakers
2. Understand the perspectives of advantages and constraints of
the theories of International Business.

International Organization
International Trade Organization (ITO)
The International Trade Organization (ITO) was the proposed name for an international
institution for the regulation of trade. The International Trade Organization (ITO) – an
intellectual precursor of the World Trade Organization (WTO) – never existed. During
and after World War II, extensive efforts were made to bring it into being, culminating in
the multilateral negotiation of a charter for the organization at Havana in 1947–1948.
However, the Havana Charter was never ratified, mainly because domestic opposition
within the United States led the Truman administration to drop its efforts to win
congressional backing for the ITO by the end of 1950. Although the attempt to create
the ITO failed, it was nonetheless significant for two reasons. First, the effort to establish
the ITO brought the General Agreement on Tariffs and Trade into being, and this in turn
had consequences for the eventual creation of the WTO. Second, the idea of the ITO
marks an important staging post in the shift between two contrasting types of trade
liberalism: moral internationalism and institutional internationalism. This article analyses
the unsuccessful attempt to create the ITO and traces the negotiation processes that
contributed to this failure.

The World Trade Organization


Created in 1995, the World Trade Organization (WTO) is an international institution that
oversees the global trade rules among nations. It superseded the 1947 General
Agreement on Tariffs and Trade (GATT) created in the wake of World War II.
The WTO is based on agreements signed by the majority of the world’s trading nations.
The main function of the organization is to help producers of goods and services, as
well as exporters and importers, protect and manage their businesses. As of 2021, the
WTO has 164 member countries, with Liberia and Afghanistan the most recent
members, having joined in July 2016, and 25 “observer” countries and governments.
The WTO is essentially an alternative dispute or mediation entity that upholds the
international rules of trade among nations. The organization provides a platform that
allows member governments to negotiate and resolve trade issues with other members.
The WTO’s main focus is to provide open lines of communication concerning trade
among its members.
For example, the WTO has lowered trade barriers and increased trade among member
countries. On the other hand, it has also maintained trade barriers when it makes sense
to do so in the global context. Therefore, the WTO attempts to provide negotiation
mediation that benefits the global economy.
Once negotiations are complete and an agreement is in place, the WTO then offers to
interpret that agreement in case of a future dispute. All WTO agreements include a
settlement process, whereby the organization legally conducts neutral conflict
resolution.
The General Agreement on Tariff and Trade (GATT)
The General Agreement on Tariffs and Trade (GATT), signed on October 30, 1947, by
23 countries, was a legal agreement minimizing barriers to international trade by
eliminating or reducing quotas, tariffs, and subsidies while preserving significant
regulations.1 The GATT was intended to boost economic recovery after World War II
through reconstructing and liberalizing global trade.

The GATT went into effect on January 1, 1948.2 Since that beginning it has been
refined, eventually leading to the creation of the World Trade Organization (WTO) on
January 1, 1995, which absorbed and extended it.3 By this time 125 nations were
signatories to its agreements, which covered about 90% of global trade.4
The Council for Trade in Goods (Goods Council) is responsible for the GATT and
consists of representatives from all WTO member countries. As of September 2020, the
chair of the Goods Council is Swedish Ambassador Mikael Anzén.5 The council has 10
committees that address subjects including market access, agriculture, subsidies, and
anti-dumping measures. The GATT was created to form rules to end or restrict the
most costly and undesirable features of the prewar protectionist period, namely
quantitative trade barriers such as trade controls and quotas. The agreement also
provided a system to arbitrate commercial disputes among nations, and the framework
enabled a number of multilateral negotiations for the reduction of tariff barriers. The
GATT was regarded as a significant success in the postwar years.
Government policies are designed to regulate, direct, and protect national
activities. The exercise of these policies is the result of national sovereignty, which
provides a government with the right to shape the environment of the country and its
citizens.
What was the main aim of trade and investment policy?
Trade and investment was liberalized to increase international competitiveness of
industrial production, foreign investments and technology. Primarily, they developed the
efficiency of domestic industries with advanced technology, and thereby followed a
regime of quantitative restrictions on imports
The debate about the extent to which countries should control the flow of foreign goods
and investments across their borders is as old as international trade itself. Governments
continue to control trade.
Example: Suppose you’re in charge of a small country in which people do two
things—grow food and make clothes. Because the quality of both products is high and
the prices are reasonable, your consumers are happy to buy locally made food and
clothes. But one day, a farmer from a nearby country crosses your border with several
wagonloads of wheat to sell. On the same day, a foreign clothes maker arrives with a
large shipment of clothes. These two entrepreneurs want to sell food and clothes in your
country at prices below those that local consumers now pay for domestically made food
and clothes. At first, this seems like a good deal for your consumers: they won’t have to
pay as much for food and clothes. But then you remember all the people in your country
who grow food and make clothes. If no one buys their goods (because the imported
goods are cheaper), what will happen to their livelihoods? Will everybody be out of
work? And if everyone’s unemployed, what will happen to your national economy?
That’s when you decide to protect your farmers and clothes makers by setting up trade
rules. Maybe you’ll increase the prices of imported goods by adding a tax to them; you
might even make the tax so high that they’re more expensive than your homemade
goods. Or perhaps you’ll help your farmers grow food more cheaply by giving them
financial help to defray their costs. The government payments that you give to the
farmers to help offset some of their costs of production are called subsidies. These
subsidies will allow the farmers to lower the price of their goods to a point below that of
imported competitors’ goods. What’s even better is that the lower costs will allow the
farmers to export their own goods at attractive, competitive prices.
The United States has a long history of subsidizing farmers. Subsidy programs
guarantee farmers (including large corporate farms) a certain price for their crops,
regardless of the market price. This guarantee ensures stable income in the farming
community but can have a negative impact on the world economy. How? Critics argue
that in allowing American farmers to export crops at artificially low prices, U.S.
agricultural subsidies permit them to compete unfairly with farmers in developing
countries. A reverse situation occurs in the steel industry, in which a number of
countries—China, Japan, Russia, Germany, and Brazil—subsidize domestic producers.
U.S. trade unions charge that this practice gives an unfair advantage to foreign
producers and hurts the American steel industry, which can’t compete on price with
subsidized imports.
Whether they push up the price of imports or push down the price of local goods, such
initiatives will help locally produced goods compete more favorably with foreign goods.
Both strategies are forms of trade controls—policies that restrict free trade. Because
they protect domestic industries by reducing foreign competition, the use of such
controls is often called protectionism. Though there’s considerable debate over the pros
and cons of this practice, all countries engage in it to some extent.
Types of Trade Restrictions
Tariffs
Levied means impose
A tariff, is a tax levied on an imported good. A “unit” or specific tariff is a tax levied as a
fixed charge for each unit of a good that is imported – for instance $300 per ton of
imported steel. An “ad valorem” tariff is levied as a proportion of the value of imported
goods. Tariffs are taxes on imports. Because they raise the price of the foreign-made
goods, they make them less competitive.
Tariffs have three primary functions: to serve as a source of revenue, to protect
domestic industries, and to remedy trade distortions (punitive function). The revenue
function comes from the fact that the income from tariffs provides governments with a
source of funding.
The Philippines reduces import tariffs on rice for a period of one year

10/06/2021,
On 15 May 2021, the Government of the Republic of the Philippines announced the
lowering of the Most Favoured Nation (MFN) tariff rates on rice for a period of one year,
starting 2 June 2021. The measure reduced tariff rates on in-quota rice imports from 40
percent to 35 percent and those on out-quota rice imports from 50 percent to 35
percent. The temporary tariff reduction aims to encourage traders to import rice to boost
market supplies while diversifying the country’s sources, targeting non-ASEAN
countries. Coupled with a foreseen increase in paddy production in 2021, the increased
imports of rice are expected to maintain affordable prices for consumers and contain
inflationary pressure, amid concerns about increased prices of food, mainly pork meat
and products, driven by African Swine
Quotas
A quota is a government-imposed trade restriction that limits the number or monetary
value of goods that a country can import or export during a particular period. In theory,
quotas boost domestic production by restricting foreign competition. For example, a
government may place a quota limiting a neighboring nation to importing no more than
10 tons of grain. Each ton of grain after the 10th incurs a 10% tax. A quota imposes
limits on the quantity of a good that can be imported over a period of time. Quotas are
used to protect specific industries, usually new industries or those facing strong
competitive pressure from foreign firms
Sometimes quotas protect one group at the expense of another. To protect sugar beet
and sugar cane growers, for instance, the United States imposes a tariff-rate quota on
the importation of sugar—a policy that has driven up the cost of sugar to two to three
times world prices (Edwards, 2007). These artificially high prices push up costs for
American candy makers, some of whom have moved their operations elsewhere, taking
high-paying manufacturing jobs with them. Life Savers, for example, were made in the
United States for ninety years but are now produced in Canada, where the company
saves $10 million annually on the cost of sugar (Will, 2004).
Because the United States has placed quotas on textile and apparel imports for the last
thirty years, certain countries, such as China and India, have been able to export to the
United States only as much clothing as their respective quotas permit. One effect of this
policy was spreading textile and apparel manufacture around the world and preventing
any single nation from dominating the world market. As a result, many developing
countries, such as Vietnam, Cambodia, and Honduras, were able to enter the market
and provide much-needed jobs for local workers.

Embargo
An embargo is a government order that restricts commerce with a specified country or
the exchange of specific goods. An embargo is usually created as a result of
unfavorable political or economic circumstances between nations. It is designed to
isolate a country and create difficulties for its governing body, forcing it to act on the
issue that led to the embargo. An embargo is a powerful tool that can influence a nation,
both economically and politically. The ability to easily trade goods all over the world is
key to maximizing the economic prosperity of a country. When that is no longer
possible, it can have serious negative consequences.

The decisions on trade embargoes and other economic sanctions made by the United
States are often based on mandates by the United Nations (UN), an international
organization formed in 1945 to increase political and economic cooperation. Allied
countries frequently band together, making joint agreements to restrict trade with
specific nations. This is often done to force humanitarian changes or reduce perceived
threats to international peace.
Embargoes do not necessarily apply to all goods moving in and out of a country’s
borders. Sometimes only certain items are embargoed, such as military equipment or
oil.
An extreme form of quota is the embargo, which, for economic or political reasons, bans
the import or export of certain goods to or from a specific country. The United States, for
example, bans nearly every commodity originating in Cuba.

Dumping
A common political rationale for establishing tariffs and quotas is the need to combat
dumping: the practice of selling exported goods below the price that producers would
normally charge in their home markets (and often below the cost of producing the
goods). Usually, nations resort to this practice to gain entry and market share in foreign
markets, but it can also be used to sell off surplus or obsolete goods. Dumping creates
unfair competition for domestic industries, and governments are justifiably concerned
when they suspect foreign countries of dumping products on their markets. They often
retaliate by imposing punitive tariffs that drive up the price of the imported goods.
Dumping is when foreign firms dump products at artificially low prices in the European
market. This could be because countries unfairly subsidize products or companies have
overproduced and are now selling the products at reduced prices in other markets.
Example: Excess supplies are destroyed. Example, Asian farmers dumped small
chickens into the sea. Another method is to have the excess supply dumped in a foreign
market where the product is normally not sold. It involves sale of goods in overseas
markets at a price lower than the home market price.

Key Takeaways
Because they protect domestic industries by reducing foreign competition, the use of
controls to restrict free trade is often called protectionism.
Though there’s considerable debate over protectionism, all countries engage in it to
some extent.
Tariffs are taxes on imports. Because they raise the price of the foreign-made goods,
they make them less competitive.
Quotas are restrictions on imports that impose a limit on the quantity of a good that can
be imported over a period of time. They’re used to protect specific industries, usually
new industries or those facing strong competitive pressure from foreign firms.
An embargo is a quota that, for economic or political reasons, bans the import or export
of certain goods to or from a specific country.
A common rationale for tariffs and quotas is the need to combat dumping—the practice
of selling exported goods below the price that producers would normally charge in their
home markets (and often below the costs of producing the goods).
Some experts believe that governments should support free trade and refrain from
imposing regulations that restrict the free flow of products between nations.
Others argue that governments should impose some level of trade regulations on
imported goods and services.
Exercise

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