Slide global business today chap005 the political economy of international trade

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights CHAPTER The Political Economy of International Trade McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Key Issues • How governments use policy to restrict imports and promote exports? • Why some governments intervene to influence import-export flows? • Is such government intervention self-defeating? • What is the evolution, purpose of the global trading system (GATT, WTO)? • What are the implications on business of government intervention? McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-1 Governments and Trade • Free trade: a government does not restrict what its citizens can but from or sell to another country • Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy • Higher level domestic consumption; more efficient use of resources • Stimulation of domestic growth and wealth creation McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-2 Governments and Trade • More often governments manage trade (… level the “playing-field”) – Restriction of imports: protectionist intervention – Promotion of exports – Trade promo and FDI incentives • Free-trade “Good” or “Bad”? – Social issues related to free-trade – Implications for business and individual groups McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-3 Instruments of Trade Policy • • • • • • • McGraw-Hill/Irwin Tariffs Subsidies Import quotas Voluntary export restraints Local content requirements Anti-dumping policies Administrative policies © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-4 Tariffs • Taxes levied on imports (also sometimes on exports) – Specific tariff: fixed charge for each good imported – Ad valorem tariff: a % of imported goods value • Who gains: – Government – Domestic producers (at least in the short run) – Employees of protected industries keep their jobs • Who loses: – Consumers who pay higher prices – The economy which remains inefficient – Employees of protected industries who don’t develop new skills McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-5 Subsidies • Are government payments to domestic producers – Cash grants, low-interest loans, tax breaks, government equity participation in domestic firms, government orders • Subsidies are aimed at lower costs to help – – – – Compete against cheaper imports Gain export markets Increase domestic employment Local producers achieve first-mover advantage in emerging industries • Governments tax individuals… to pay for subsidies • Consumers buy more expensive goods with lower disposable incomes McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-6 • Import Quotas and Voluntary Export Restraints – Import quota: government specifies how much of what product can be imported from which countries – Voluntary export restraint: a quota imposed by the exporting country officially or unofficially • Local Content Requirements – Some % of a good has to be produced domestically with local raw materials and local labor – Used by LDCs to • Achieve technology transfer, skills transfer • Shift manufacturing base to a higher technological level – Similar effects to those of import quotas McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-7 • Anti-dumping Policies – Dumping: selling goods in an overseas market • At below their production costs or • Below “fair market value” – Anti-dumping policies punish producers who dump and protect domestic producers • Administrative policies – Bureaucratic rules that make it difficult for imports to enter a country McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-8 Political Arguments for Intervention • • • • • National security Individual industries and jobs protected Retaliation Consumer protection (health, safety) Furthering foreign policy objectives Economic Arguments for Intervention • Infant industry protection • Strategic trade policy McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-9 International Trade Cooperation (!) • U.S.A and: – foreign companies trading with Cuba – any company dealing with Iran-Iraq • W.T.O in place but – disputes with China dealt on bilateral basis – disputes with Japan dealt on bilateral basis – trade blocks proliferating McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-10 The Global Trading System • Smith to Great Depression – Britain adopts free trade in 1846 – Smoot-Hawley act (US) 1930 aimed at employment protection one cause of the Great Depression • 1947-1979: GATT, Trade Liberalization, Economic Growth • 1980-1993: GATT needs fixing – Uruguay round of GATT negotiations (1986-1993) – Creation of WTO with powers to implement trade agreements McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-11 GATT • Pre-WWII protectionism – Smoot-Hawley +57% import tariffs (1930) – UK, France, Italy followed suit – world depression in ‘30s • Havana Conference (1947) -> GATT – – – – 125 countries by 1994 small staff in Geneva tariffs fm 40% in ‘47 to 3% in ‘95 trade 15x to $6.75 trillion in 92 WTO superceded GATT in 1995 McGraw-Hill/Irwin â 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-12 GATT/WTO • MFN-Most Favored Nation – any preferential treatment offered to one member country must be extended to all other members – members can extend MFN to non-members • Exceptions – GSP (Generalized System of Preferences) for LDCs – regional arrangements such as NAFTA – countries still use NTBs, other loopholes (peanut waiver, 1955) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-13 Uruguay Round of GATT negotiations • Tariffs cut further • Agricultural Policy Modified: – cut price supports 20%, export subsidies 36% – For this policy: USA, Argentina, Australia, Canada – Anti: Japan, Korea, India, EU • Services given prominence: developed set of principles • Intellectual Property Rights protected further: patents, copyrights, trademarks, brand names • WTO created: to implement Uruguay round, controversial McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-14 WTO: Early Experience • WTO as a global policeman – Up to 1995-1999: 160 ± cases brought for decision – 30 ± withdrawn after direct discussions between countries in dispute – 100 + undergoing direct discussion – 20 ± in final stage of solution implementation – have been settled – closed with no need for action • GATT dealt with 196 cases from 1947-1995! • WTO telecommunications agreement 1998 (effect) • WTO Financial Services agreement 1999 (effect) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights The Future of WTO • • • • Antidumping Action Protectionism in Agriculture Protecting Intellectual Property Launching a new round of talks: Doha McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Slide 5-15 “So what” for Business” • Trade barriers affect firm strategy • Government policy has direct impact on firm business McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights ... self-defeating? • What is the evolution, purpose of the global trading system (GATT, WTO)? • What are the implications on business of government intervention? McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies,...CHAPTER The Political Economy of International Trade McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Key Issues • How... Slide 5-1 Governments and Trade • Free trade: a government does not restrict what its citizens can but from or sell to another country • Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy