intern

ation

al bu

siness, 5

th edition

chapter 9formulation of national trade policies

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Chapter Objectives 1

• Present the major arguments in favor of and against governmental intervention in international trade

• Identify the advantages and disadvantages of adopting an industrial policy

• Analyze the role of domestic politics in formulating a country’s international trade policies

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Chapter Objectives 2

• Describe the major tools countries use to restrict trade

• Specify the techniques countries use to promote international trade

• Explain how countries protect themselves against unfair trade practices

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Issues on 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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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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National Trade Policies

Economic Development Programs

Industrial Policy

Public Choice Analysis

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Economic Development Programs

ExportPromotionStrategy

ImportSubstitution

Strategy

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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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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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Map 9.1 An Effect of the Jones Act

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Reasons for Tariffs

• Tariffs raise revenues for national governments

• Tariffs act as a barrier to trade

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Tariff Barriers to International Trade

Exporttariffs

Importtariffs

Ad valorem

Specific

Compound

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More than 300 workers lost their jobs when this Detroit auto plant closed.

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Figure 9.3 Impact of an Import Tariff on Demand for U.S.–Made Minivans

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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 sugar cane workers receive less for their crops because of the tariff-

rate quota imposed by the U.S.

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Forms of Nonquantitative NTBs

• 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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Map 9.2 Foreign Trade Zone on Mauritius

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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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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