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The Political Economy of International Trade (Chapter 6) (How do…
The Political Economy of International Trade (Chapter 6)
What is the Political Reality of International Trade?
Free trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups
How do governments intervene in markets?
Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country's government
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country
policies hurt consumers by limiting choice
Antidumping Policies - aka countervailing duties - designed to punish foreign firms that engage in dumping and protect domestic producers from "unfair" foreign competition
dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their "fair" market value
enables firms to unload excess production in foreign markets
may be predatory behaviour - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices
Local Content Requirements - demand that some specific fraction of a good be produced domestically
benefit domestic producers
consumers face higher prices
Subsidies - government payments to domestic producers
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of subsidies
Import Quotas - restrict the quantity of some good that may be imported into a country
Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
A quota rent - the extra profit that producers make when supply is artificially limited by an import quota
Government use various methods to intervene in markets including
Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products
Specific tariffs - levied as a fixed charge for each unit of a good imported
Ad valorem tariffs - levied as a proportion of the value of the imported good
Tariffs
increase government revenues
force consumers to pay more for certain imports
are pro-producer and anti-consumer
reduce the overall efficiency of the world economy
Why do Government Intervene in markets?
There are two main arguments for government intervention in the market
Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
Economic Arguments - concerned with boosting the overall wealth of a nation - benefits both producers and consumers
What are the Political Arguments for Government Intervention?
Protecting industries deemed important for national security - industries like aerospace or electronics are often protected because they are deemed important for national security
Retaliating to unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers
if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
Protecting jobs - the most common political reason for trade restrictions
results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers
Protecting consumers from "dangerous" products - limit "unsafe" products
Furthering the goals of foreign policy - a preferential trade terms can be granted to countries that a government wants to build strong relations with
trade policy can also be used to punish rogue states
Protecting the human rights of individuals in exporting countries - through trade policy actions
the decision to grant China MFN status in 1999 was based on this philosophy
What do Trade Barriers mean for managers?
Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm
Trade barriers raise the cost of exporting products to a country
Voluntary export restraints (VERs) may limit a firm's ability to serve a country from locations outside that country
To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise
Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies