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Instruments Of Trade Policy

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Political Economy Of International Trade discusses various trade policies used by countries and their effects. It notes that rich nations subsidize their agricultural sectors, creating surpluses and depressing global prices. This costs developing nations an estimated $50 billion annually in lost export revenue. The document also examines instruments of trade policy like tariffs, quotas, localization requirements, and anti-dumping policies. It outlines arguments for and against trade interventions and discusses the development of the World Trade Organization to liberalize and regulate global commerce.

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Political Economy Of International Trade
Case: Agricultural subsidies and development Rich nations spend more than $300 billion a year to subsidize their farmers Subsidies create surplus production Surplus production leads to dumping and depressed prices UN estimates producers in developing nations lose $50 billion export revenue because of depressed prices
Agricultural subsidies and development Rich countries of the developed world subsidize farm products Reasons To keep commodity prices low To favor politically active farmers Consequences Surplus production Depressed world prices (a result of surplus)
Instruments of trade policy Tariffs - oldest form of trade policy Specific Ad valorem Good for government Protects domestic producers Reduces efficiency Bad for consumers Increases cost of goods
Instruments of trade policy-subsidies Government payment to a domestic producer Cash grants Low-interest loans Tax breaks Government equity participation in the company Subsidy revenues are generated from taxes Subsidies encourage over-production, inefficiency and reduced trade
Instruments of trade policy - Quota Import quota Restriction on the quantity of some good imported into a country Voluntary export restraint (VER) Quota on trade imposed by exporting country, typically at the request of the importing country
Instruments of trade policy -Quota Benefits producers by limiting import competition Japan – limited exports to 1.85 mm vehicles/year Cost to consumers - $1B/year between ‘81 - 85. Money went to Japanese producers in the form of higher prices Encourages strategic action by firms in order to circumvent quota
Instruments of trade policy- local content Requires some specific fraction of a good to be produced domestically Percent of component parts Percent of the value of the good Initially used by developing countries to help shift from assembly to production of goods. Developed countries (US) beginning to implement. For component parts manufacturer, LC Regulations acts the same as an import quota Benefits producers, not consumers
Instruments of trade policy-administrative policies Bureaucratic rules designed to make it difficult for imports to enter a country. Japanese ‘masters’ in imposing rules.
Instruments of trade policy-anti dumping policies Defined as Selling goods in a foreign market below production costs Selling goods in a foreign market below fair market value Result of Unloading excess production. Predatory behavior Remedy: seek imposition of tariffs
Political arguments for intervention Protecting jobs and industries Common Agricultural Policy (Europe) and VER National security Defense industries - semiconductors Retaliation Punitive sanctions
Political arguments for intervention Protecting consumers Genetically engineered seeds and crops Hormone treated beef Protecting human rights MFN
Economic arguments for intervention Infant industry. Oldest argument - Alexander Hamilton, 1792 Protected under the WTO Only good if it makes the industry efficient. Brazil auto-makers - 10th largest - wilted when protection eliminated Requires government financial assistance. Today if the industry is a good investment, global capital markets would invest
Economic arguments for intervention Strategic trade policy Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms
Development of the world trading system GATT -multilateral agreement established under US leadership 1948 Objective is to liberalize trade by eliminating tariffs, subsidies, & import quotas 19 original members grew to 120
Development of the world trading system Used ‘Rounds of talks’ to gradually reduce trade barriers Uruguay Round GATT 1986-93 Mutual tariff reductions negotiated Dispute resolution only if complaints were received
Disturbing trends in the world trading system Pressure for greater protectionism due to Increase in the power of Japan’s economic machine and closed Japanese markets US trade deficit GATT circumvented by many countries Through use of VER
GATT criticisms Economic theories don’t fit the ‘real world’ model US global preeminence has declined Shift from cutting tariffs to eliminating non-tariff barriers angered countries ‘National Treatment’ or ‘Most Favored Nation’ status results in inequalities
The World Trade Organization The WTO was created during the Uruguay Round of GATT to police and enforce GATT rules Most comprehensive trade agreement in history Formation of WTO had an impact on Agriculture subsidies (stumbling block: US/EU) Applied GATT rules to services and intellectual property (TRIPS) Strengthened GATT monitoring and enforcement
The WTO 145 members in 2003 Represents 90% of world trade 9 of 10 disputes satisfactorily settled Tariff reduction from 40% to 5% Trade volume of manufactured goods has increased 20 times
The WTO Policing organization for: GATT Services Intellectual property Responsibility for trade arbitration: Reports adopted unless specifically rejected After appeal, failure to comply can result in compensation to injured country or trade sanctions
WTO at work 280 disputes brought to WTO between 1995 and 2003 196 handled by GATT during its 50 year history US is biggest WTO user
The WTO -achievements Telecommunications (1997) 68 countries (90%) of world telecommunications revenues Pledged to open their market to fair competition Financial Services (1997) 95% of financial services market 102 countries will open, their markets to varying degrees
WTO in Seattle Millennium round was aimed at further reduction of trade barriers in agriculture and services WTO meeting disrupted by Human rights groups Trade unions Environmentalists Anti globalization groups No agreement was reached
Doha agenda -WTO Cutting tariffs on industrial goods and services Phasing out subsidies Reducing antidumping laws WTO regulation on intellectual property should not prevent members from protecting public health TRIPS agreement
Antidumping cases by WTO members Fig 5.1
Antidumping actions Four sectors account for 70 percent of all antidumping actions reported to WTO Metal industries Chemicals Plastics Machinery and electrical equipment Actions often initiated by politicians in the various countries to please strong lobbying groups in exchange for votes
Protectionism in agriculture Recent focus of WTO on agricultural subsides These are 3 to 5 times higher than non-agricultural subsidies Advanced nations are the strongest defenders of this system Combination of high tariffs and subsides on agricultural product Raises price to the consumer Reduces volume of agricultural trade Encourages overproduction of subsidized products
Protection of intellectual property Trade related Aspects of Intellectual property (TRIPS) WTO members allowed to grant and enforce patents and copyrights This encourages innovation Reduces piracy rates in drugs, software music Expected to boost global economic rates and social and economic welfare around the world
Managerial implications Trade barriers act as a constraint on firm strategy May be useful to establish more production activities in the protected country Business gains from government’s efforts to open protected markets are more than gains from governments efforts to protect domestic industries/firms

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Instruments Of Trade Policy

  • 1. Political Economy Of International Trade
  • 2. Case: Agricultural subsidies and development Rich nations spend more than $300 billion a year to subsidize their farmers Subsidies create surplus production Surplus production leads to dumping and depressed prices UN estimates producers in developing nations lose $50 billion export revenue because of depressed prices
  • 3. Agricultural subsidies and development Rich countries of the developed world subsidize farm products Reasons To keep commodity prices low To favor politically active farmers Consequences Surplus production Depressed world prices (a result of surplus)
  • 4. Instruments of trade policy Tariffs - oldest form of trade policy Specific Ad valorem Good for government Protects domestic producers Reduces efficiency Bad for consumers Increases cost of goods
  • 5. Instruments of trade policy-subsidies Government payment to a domestic producer Cash grants Low-interest loans Tax breaks Government equity participation in the company Subsidy revenues are generated from taxes Subsidies encourage over-production, inefficiency and reduced trade
  • 6. Instruments of trade policy - Quota Import quota Restriction on the quantity of some good imported into a country Voluntary export restraint (VER) Quota on trade imposed by exporting country, typically at the request of the importing country
  • 7. Instruments of trade policy -Quota Benefits producers by limiting import competition Japan – limited exports to 1.85 mm vehicles/year Cost to consumers - $1B/year between ‘81 - 85. Money went to Japanese producers in the form of higher prices Encourages strategic action by firms in order to circumvent quota
  • 8. Instruments of trade policy- local content Requires some specific fraction of a good to be produced domestically Percent of component parts Percent of the value of the good Initially used by developing countries to help shift from assembly to production of goods. Developed countries (US) beginning to implement. For component parts manufacturer, LC Regulations acts the same as an import quota Benefits producers, not consumers
  • 9. Instruments of trade policy-administrative policies Bureaucratic rules designed to make it difficult for imports to enter a country. Japanese ‘masters’ in imposing rules.
  • 10. Instruments of trade policy-anti dumping policies Defined as Selling goods in a foreign market below production costs Selling goods in a foreign market below fair market value Result of Unloading excess production. Predatory behavior Remedy: seek imposition of tariffs
  • 11. Political arguments for intervention Protecting jobs and industries Common Agricultural Policy (Europe) and VER National security Defense industries - semiconductors Retaliation Punitive sanctions
  • 12. Political arguments for intervention Protecting consumers Genetically engineered seeds and crops Hormone treated beef Protecting human rights MFN
  • 13. Economic arguments for intervention Infant industry. Oldest argument - Alexander Hamilton, 1792 Protected under the WTO Only good if it makes the industry efficient. Brazil auto-makers - 10th largest - wilted when protection eliminated Requires government financial assistance. Today if the industry is a good investment, global capital markets would invest
  • 14. Economic arguments for intervention Strategic trade policy Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms
  • 15. Development of the world trading system GATT -multilateral agreement established under US leadership 1948 Objective is to liberalize trade by eliminating tariffs, subsidies, & import quotas 19 original members grew to 120
  • 16. Development of the world trading system Used ‘Rounds of talks’ to gradually reduce trade barriers Uruguay Round GATT 1986-93 Mutual tariff reductions negotiated Dispute resolution only if complaints were received
  • 17. Disturbing trends in the world trading system Pressure for greater protectionism due to Increase in the power of Japan’s economic machine and closed Japanese markets US trade deficit GATT circumvented by many countries Through use of VER
  • 18. GATT criticisms Economic theories don’t fit the ‘real world’ model US global preeminence has declined Shift from cutting tariffs to eliminating non-tariff barriers angered countries ‘National Treatment’ or ‘Most Favored Nation’ status results in inequalities
  • 19. The World Trade Organization The WTO was created during the Uruguay Round of GATT to police and enforce GATT rules Most comprehensive trade agreement in history Formation of WTO had an impact on Agriculture subsidies (stumbling block: US/EU) Applied GATT rules to services and intellectual property (TRIPS) Strengthened GATT monitoring and enforcement
  • 20. The WTO 145 members in 2003 Represents 90% of world trade 9 of 10 disputes satisfactorily settled Tariff reduction from 40% to 5% Trade volume of manufactured goods has increased 20 times
  • 21. The WTO Policing organization for: GATT Services Intellectual property Responsibility for trade arbitration: Reports adopted unless specifically rejected After appeal, failure to comply can result in compensation to injured country or trade sanctions
  • 22. WTO at work 280 disputes brought to WTO between 1995 and 2003 196 handled by GATT during its 50 year history US is biggest WTO user
  • 23. The WTO -achievements Telecommunications (1997) 68 countries (90%) of world telecommunications revenues Pledged to open their market to fair competition Financial Services (1997) 95% of financial services market 102 countries will open, their markets to varying degrees
  • 24. WTO in Seattle Millennium round was aimed at further reduction of trade barriers in agriculture and services WTO meeting disrupted by Human rights groups Trade unions Environmentalists Anti globalization groups No agreement was reached
  • 25. Doha agenda -WTO Cutting tariffs on industrial goods and services Phasing out subsidies Reducing antidumping laws WTO regulation on intellectual property should not prevent members from protecting public health TRIPS agreement
  • 26. Antidumping cases by WTO members Fig 5.1
  • 27. Antidumping actions Four sectors account for 70 percent of all antidumping actions reported to WTO Metal industries Chemicals Plastics Machinery and electrical equipment Actions often initiated by politicians in the various countries to please strong lobbying groups in exchange for votes
  • 28. Protectionism in agriculture Recent focus of WTO on agricultural subsides These are 3 to 5 times higher than non-agricultural subsidies Advanced nations are the strongest defenders of this system Combination of high tariffs and subsides on agricultural product Raises price to the consumer Reduces volume of agricultural trade Encourages overproduction of subsidized products
  • 29. Protection of intellectual property Trade related Aspects of Intellectual property (TRIPS) WTO members allowed to grant and enforce patents and copyrights This encourages innovation Reduces piracy rates in drugs, software music Expected to boost global economic rates and social and economic welfare around the world
  • 30. Managerial implications Trade barriers act as a constraint on firm strategy May be useful to establish more production activities in the protected country Business gains from government’s efforts to open protected markets are more than gains from governments efforts to protect domestic industries/firms