Ch9New PPT

9-1

chapter 9

Formulation of National

Trade Policies

International Business, 6th E

dition

Griffin & Pustay

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

9-2

Rationales for Trade Intervention

• Should a national government intervene to protect the country’s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?

• Should a national government directly help the country’s domestic firms increase their foreign sales through export subsidies, government-to-government negotiations, and guaranteed loan programs?

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Free Trade or Fair Trade?

Free Trade Fair Trade

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Industry-Level Arguments

National Defense

Infant Industry

Maintenance of Existing Jobs

Strategic Trade

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National Defense Argument

• Country must be self-sufficient in critical raw materials, machinery, and technology or else be vulnerable to foreign threats

• Appeals to general public

• Protects steel, electronics, and machine tools industries, and merchant marines

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Infant Industry Argument

• Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established

• Powerful economic development strategy

• Which industries should be protected? For how long?

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Maintenance of Existing Jobs

• Jobs in high-wage countries threatened by imports from low-wage countries

• Forms of assistance

– Tariffs

– Quotas

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9-8

Strategic Trade Theory

Strategic trade theory suggests that a national government can make its country better off if it adopts trade

policies that improve the competitiveness of its domestic firms

in such oligopolistic industries.

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9-9

STP Example

Boeing

Airbus

Develop

Do not develop

Develop

Do not develop

0

000

10

10- 1- 1

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STP Example: Subsidy Effects

Boeing

Airbus

Develop

Do not develop

Develop

Do not develop

0

000

10

10 + 2 = 12- 1 + 2 = 1

- 1

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In the News: EADS Deal

• EADS – European Aeronautic Defense and Space Company• Was fighting for a $35bn order to build refuelling tankers for U.S. Air Force• Boeing was supplying tankers to Air Force for the last 50 years• Pros: Business reasons; EADS domestication; Boeing 2002 scandal• Cons: Security implications; employment in US• Boeing wins

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National Trade Policies

Economic Development Programs

Industrial Policy

Public Choice Analysis

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9-13

Economic Development Programs

ExportPromotionStrategy

ImportSubstitution

Strategy

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9-14

Industrial Policy

When industrial policy is pursued, the national government identifies

key domestic industries critical to the country’s future economic growth

and then formulates programs that promote their competitiveness.

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9-15

Public Choice Analysis

Special interest groups are willing to work harder for the passage of laws favorable to their interests than the general public is willing to work for

the defeat of laws unfavorable to its interests.

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9-16

Map 9.1 An Effect of the Jones Act

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Barriers to International Trade

• Tariffs: tax placed on a good that is traded internationally

• Non-tariff Barriers: governmental controls on international trade

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9-18

Tariff Barriers to International Trade

Exporttariffs

Importtariffs

Ad valorem

Specific

Compound

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Reasons for Tariffs

• Tariffs raise revenues for national governments

• Tariffs act as a barrier to trade

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9-20

Figure 9.3 Impact of an Import Tariff on Demand for U.S.-Made SUVs

Quantity of U.S.-made SUVs

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Nontariff Barriers

• Quotas

• Numerical export controls

• Product and testing standards

• Restricted access to distribution networks

• Public-sector procurement policies

• Regulatory controls

• Currency controls

• Investment controls

• Local-purchase requirements

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Figure 9.4 Tariff Rate Quota on Widgets

A tariff rate quota imposes high tariff rates on imports above the threshold level.

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These Indian sugarcane workers receive less for their crops because of the tariff-

rate quota imposed by the U.S.

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Other Nontariff Barriers

• Product and testing standards

• Restricted access to distribution networks

• Public-sector procurement policies

• Local-purchase requirements

• Regulatory controls

• Currency controls

• Investment controls

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Figure 9.5 Types of Barriers to International Trade

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Promotion of International Trade

Subsidies

Foreign Trade Zones

Export Financing Programs

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9-27

Map 9.2 Foreign Trade Zone on Mauritius

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9-28

Controlling Unfair Trade Practices

• International Trade Administration (ITA)

– Division of U.S. Department of Commerce

– Determines whether an unfair trade practice has occurred

– Confirmed cases transferred to U.S. International Trade Commission (ITC)

• Two types of unfair trade practices

– Government subsidies

– Unfair pricing practices

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9-29

Controlling Unfair Trade Practices

CountervailingDuties

AntidumpingRegulations

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Objectives of Unfair Trade Practice Laws

• Promote global efficiency by encouraging production in those countries that can produce a good most efficiently

• Ensure that trade occurs on the basis of comparative advantage, not the size of government subsidies

• Protect consumers from predatory behavior

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