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Instituto Superior de Contabilidade e

Administrao do Porto

International Economics

Trade Restrictions and Trade Policy


Firms, Location, and Distance

Students:

2015/2016

CONTENT
1. TRADE RESTRICTIONS AND TRADE POLICY
1.1.Trade policy or Commercial policy
1.2.Trade restrictions (advantages and disadvantages)
1.3.Types of trade barriers and restrictions ..
1.4.Regional Trade Agreements (RTAs).
1.5.Imports of Romania.
1.6.Imports of Poland..
2. FIRMS, LOCATION, AND DISTANCE
2.1.Transport costs..
2.2.Gravity model.
2.3.Distance and types of distance.
2.4.Porters Diamond model
2.5.Exports of Romania
2.6.Exports of Poland
3. USED RESOURCES.

1. TRADE RESTRICTIONS AND TRADE POLICY


1.1.

Trade Policy or Commercial Policy

Trade policy which is also known as commercial policy, can be defined as laws related to
the exchange of goods or services involved in international trade including taxes, subsidies, and
import/export regulations1.
A country's commercial policy includes the use of tariffs and other trade barriers, such as
restrictions on what goods can be imported or exported, and which countries are allowed to
import or export goods to the home country.
Countries that are part of an economic union often have a single commercial policy that
determines how member countries can interact with non-member countries. An example of an
organization with a common commercial policy is the European Union or Mercosur.
According to the depth of a bilateral or regional reform, there might be:

a free trade area (wherein partners eliminate trade barriers with respect to each other),
a customs union (whereby partners eliminate reciprocal barriers and agree on a common

level of barriers against no partners),


or a free economic area (or deep integration as in, for example, the European Union,
where not only trade but also the movement of factors of production has been liberalized,
where a common currency, the Euro, has been instituted, and where other forms of
integration and harmonization have been established).2
Commercial policies are a point of contention in international trade, and are one of the

underlying reasons for the existence of organizations such as the World Trade Organization
(WTO). Because a country's commercial policy can include the use of tariffs and trade barriers,
free trade is negatively impacted3.

1.2.

Trade Restrictions (Advantages and Disadvantages)

1 http://www.businessdictionary.com/definition/trade-policy.html
2 https://en.wikipedia.org/wiki/Commercial_policy
3 http://www.investopedia.com/terms/c/commercial-policy.asp#ixzz3xG90xnJ1

In economics, a trade restriction is any government policy that limits the free flow of
goods and services across borders.4 Trade barriers reduce the possible quantity of goods that can
be consumed and produced within an economy. Prices will be higher, and there will be fewer
choices with regards to consumer goods.
Beneficiaries of a tariff include the government, which collects the tariff, and domestic
producers within the affected industry (or industries). The general public (consumers) loses.
Arguments in favor of trade restrictions include:

National Defense - Foreign producers should not be relied upon for production of

defense goods, even if the goods can be produced at a lower cost abroad.
Infant Industries - Start-up industries in a country may not be able to effectively
compete against foreign producers because of their small size. An argument can be made
that these industries should be protected until suitable economies of scale can be
achieved. If the economies of scale are such that the domestic industry achieves a
comparative advantage over foreign companies, the temporary protection will help to

achieve better economic efficiency.


Anti-Dumping - The claim is often made that foreign producers "dump" their goods on
the domestic market. The term dumping is applied when foreign producers are thought to
be selling goods at prices below their production costs, or below the prices charged in
their home market.
Nations often adopt trade restrictions due to:

Short-Sightedness - In the short-run, the imposition of a tariff may help to preserve jobs
in the relevant domestic industry. The effort to avoid unemployment in the affected
industry also makes for good politics. However, in the long-run, those workers will find
other jobs and the economy will be operating at full employment in a more efficient

manner.
Special Interests - Special interests can use their powers to put trade restrictions in place.
Although free trade benefits the general public, it does not necessarily benefit all groups
within the economy. Management and workers in an industry impacted by foreign goods

4 http://www.ehow.com/info_8628190_definition-trade-restrictions-economics.html

will not willingly go through dislocation and adjustments (such as retraining) that may be

necessitated by foreign competition


Economic Ignorance - Ignorance also contributes to the creation of trade restrictions.
Most members of the general public are not aware of the harm created by trade

restrictions.
Visibility - The benefits of trade restrictions are large and highly visible for small, select
groups of people. The benefits of free trade are dispersed across the general population
and are, therefore, harder to see. It is easy to note jobs lost to foreign competition; it is
not easy to see that those displaced labor resources will be reallocated to more efficient
jobs5.

1.3.

Types of Trade barriers and restrictions6

Countries will often attempt to protect their own citizen jobs through the use of trade
barriers. Trade barriers limit other countries selling foreign produced goods in some way so that
goods produced at home are more appealing to the consumer. Examples include tariffs, subsidies,
quotas, embargo, and standards.

Tariffs are taxes that are placed on imports making the import more expensive
than a comparable domestic product.

This gives the domestic producer a better chance at competing with the foreign producer. But, it
also means the domestic producer does not have to be as efficient in their production. Sometimes
a subsidy is given to the domestic producer instead of taxing the foreign good.

A subsidy is cash given to a producer: it could be lump sum or per unit.

Lump sum is a one-time payment while per unit is a certain amount of cash for every product
produced.
5 http://www.investopedia.com/exam-guide/cfa-level-1/global-economicanalysis/trade-restrictions.asp
6 http://www.econmentor.com/hs-georgia/international-economics/ssein2/definetrade-barriers-as-tariffs-quotas-embargoes-standards-andsubsidies/text/1699.html#Define the different types of trade barriers

Quotas are limits on the number of goods that may be imported during a period
of time.

Nowadays, what is the difference between a Ford assembled in the US and a Toyota
which was also assembled in the US? In the 1980's and 1990's, Japanese companies built
factories in the United States to avoid tariffs. The net benefit to the US was an increase in jobs
while Toyota and Nissan avoided having to limit how many of their autos that could be sold in
the US.

Stopping trade with another country is called an embargo and is typically carried
out through sanctions.

This tactic has been used many times in history. The US has had an embargo with Cuba for many
years and has an embargo with North Korea. Embargoes may harm the citizens of a country
before changing any government policies. In the modern world, embargoes are imposed in times
of war or due to severe failure of diplomatic relations.

A voluntary export restraint: A restriction set by a government on the quantity


of goods that can be exported out of a country during a specified period of time.

Often the word voluntary is placed in quotes because these restraints are typically implemented
upon the insistence of the importing nations7.

1.4.

Regional Trade Agreements

Regional Trade Agreements (RTAs) are the agreements whereby members accord
preferential treatment to one another in respect to trade barriers. During the second half of the
1990's, trade liberalization and the pursuit of global free trade underwent a metamorphosis. The
political momentum shifted away from what was seen by some nations as the painstakingly slow

7 http://catalog.flatworldknowledge.com/bookhub/21?e=rittenberg-ch17_s04

process of multilateral tariff negotiations to smaller regional and bilateral arrangements - the
Regional Trade Agreement8.
Levels of Regional Trade Agreements:
First, at the most basic level is Preferential Trading Agreements (PTAs) lower trade barriers
among members. Such preferential trade is usually limited to the portion of actual trade flows
from LDCs, and is often non-reciprocal. An example of such an agreement is the Papua New
Guinea - Australia Trade and Commercial Relations Agreement (PATCRA II) that has been in
effect since 1977.
Second, a Free Trade Agreement/Area (FTA) is a reciprocal arrangement whereby trade
barriers (usually tariffs) between participating nations are abolished. However, each member
determines its external trade policies against non-FTA members independently. Most commonly,
barriers to trade are reduced over time, but in most cases, not all trade is completely free from
national barriers. A prominent example of a FTA is the North American Free Trade Agreement
(NAFTA).
The third level of economic integration is the Customs Union. In a Customs Union, trade
barriers among members are eliminated. Also, the participating nations adopt a common external
trade policy (e.g. common external tariff regime or CET). A Customs Union is equivalent to an
FTA plus a common external trade policy. The Customs Union of the Southern Cone -Mercosurrepresents such an arrangement.
The fourth level of economic integration is the Common Market. In a Common Market,
countries remove all barriers to movement of both goods and factors, and retain the common
external trade policy. It is equivalent to a customs union plus free mobility of factors. One
example of Common Market is the Common Market for Eastern and Southern Africa (Comesa).
The fifth level of economic integration is the Economic Union. In an Economic Union, besides
the free goods and factor movements, member countries also adopt common macroeconomic
policies. One example of Economic Union is the European Union (EU).

8 http://intl.econ.cuhk.edu.hk/topic/index.php?did=14

1.5.

Romanian Imports (1991-2016)

Imports in Romania decreased to 5535.50 EUR Million in November from 5870 EUR
Million in October of 2015. Imports in Romania averaged 2471.53 EUR Million from 1992 until
2015, reaching an all time high of 5870 EUR Million in October of 2015 and a record low of
219.70 EUR Million in January of 1994. Imports in Romania are reported by the Institutul
National de Statistica9.
In 2013, Romania imported $71B, making it the 45th largest importer in the world.
During the last five years the imports of Romania have decreased at an annualized rate of -2.2%,
from $79.3B in 2008 to $71B in 2013. The most recent imports are led by Crude Petroleum
which represents 5.38% of the total imports of Romania, followed by Packaged Medicaments,
which account for 3.87%.10
Romania imports machinery and transport equipment, raw materials, chemicals and
fuels. Its main imports partners are other European Union members with Germany, Italy,
Hungary, France and Poland being the most important. Others include Russia and Turkey11.

9 http://www.tradingeconomics.com/romania/imports
10 http://atlas.media.mit.edu/en/profile/country/rou/#Imports
11 http://atlas.media.mit.edu/en/profile/country/rou/

1.6.

Poland
Imports12

Poland shipped US$214.5 billion worth

of products

around the globe in 2014. That figure


represents roughly 1.1% of overall
global exports estimated

at $18.659 trillion. From a continental perspective,


87.5% of Polands total exports by value in 2014 were delivered to
other

European trade partners. Asian importers purchased 6.4% of Polish shipments while 3.1% worth
arrived in North America.
Below is a list showcasing 15 of Polands top import partners, countries that imported the
most Polish shipments by dollar value during 2014. Also shown is each import countrys
percentage of total Polish exports:
1.Germany: US$55.6 billion (25.9% of total Polish exports)
2.

United Kingdom: $13.7 billion (6.4%)

3.

Czech Republic: $13.4 billion (6.3%)

4.

France: $12 billion (5.6%)

5.

Italy: $9.8 billion (4.5%)

6.

Russia: $9.4 billion (4.4%)

7.

Netherlands: $8.9 billion (4.1%)

8.

Sweden: $6.1 billion (2.8%)

9.

Hungary: $5.7 billion (2.6%)

10.

Slovakia: $5.4 billion (2.5%)

11.

Spain: $5.3 billion (2.5%)

12 http://forsal.pl/artykuly/899144,polski-eksport-mocno-w-gore-import-tez-rosniegus-podal-najnowsze-dane.html

12.

United States: $4.9 billion (2.3%)

13.

Belgium: $4.8 billion (2.3%)

14.

Ukraine: $4.2 billion (2%)

15.

Norway: $3.7 billion (1.7%)

Three-quarters (75.9%) of Polish exports in 2014 were delivered to the above 15 trade
partners.
All 15 major import partners increased their purchases from Poland during 2010 to 2014.
Gains ranged from a minimum of 3.5% for Italy up to 68.9% for America.

2.

2. FIRMS,

LOCATION, AND DISTANCE

2.1. Transport costs


The most important measure in international trade is difference between CIF (Cost,
Insurance, Freight) and FOB (Free on Board) quotations of trade. CIF is a trade term requiring
the seller to arrange for the carriage of goods by sea to a port of destination, and provide the
buyer with the documents necessary to obtain the goods from the carrier. FOB means that the
goods are delivered to the carrier and the title and responsibility passes to the customer.

The difference between these two values is a measure of the cost of getting item from the
exporting country to importing country. As more and more countries trade internationally what
are the impacts of transport and logistics costs?13
Maritime transport costs
Ships have moved goods around the world for many years and still this transport is really
important. Ninety percent of world trade by volume is carried by ship.
Maritime transport costs are affected by factors such as:
port infrastructure,

the price of oil

time at sea

competition among carriers

corruption and piracy.

Flight transport costs, factors affecting freight demand:

The Economy

International Trade Agreements

International Transportation Agreements

User charges and other taxes14

2.2.

Gravity model15

Gravity model is a very powerful model that relates aggregate trade and investment flows
to distance. In comparison standard trade theory to Gravity model, in standard trade theory
countries are dimensionless points in space and exact location of those countries doesnt matter,
in Gravity model position does matter.
13 http://www.tongji.edu.cn/~yangdy/quick/ch2.htm#6
14 http://www.oecd.org/tad/benefitlib/trade-costs.htm
15 http://www.economywatch.com/international-trade/gravity-model.html

The equation representation of the Gravity Model of Trade is as follows:

F ij = G * Mi * Mj / D ij
In this formula G is the constant, F stands for trade flow, D stands for the distance and M
stands for the economic dimensions of the countries that are being measured. The equation can
be changed into a linear form for the purpose of econometric analyses by employing logarithms.
In its linear form the equation representation of the Gravity Model of Trade would be as follows:

In Gravity models distance is important because Geographic distance has a large effect on
trade and investment flows. Relative importance of geographic distance differs for export and
(different types of) multinational activity. It is important to realize that the determinant of trade
and horizontal multinational activity are fundamentally interrelated because both are option to
serve customers in foreign market. Also really important is that, Gravity model assume that there
is no difference within countries. That means that distance is calculated between countries which
is simplified model of reality.
The Gravity Model of Trade has been a success from the empirical point of view.
However, there have been some reservations regarding the theoretical justifications that have
been put forward in favor of the model. This model is normally used in order to assess the trends
in the world of global trade. 16

2.3.

Distance and types of distance

Distance doesnt only relate to geography, there are other things that the distance firms
need to overcome for instance cultural, economic, legal differences. Doing business abroad is not
only additional financial costs compared to domestic business. The total sum of additional costs
includes hidden cost related to dealing with new rules and regulations or new culture. The bigger
the distance (all kinds) is the harder to get succeed abroad.
Now I will explain every type of distance:
Geographic distance- directly related to transport costs. Important choice for
companies made abroad is between export and local production. When company decides to serve
16 https://en.wikipedia.org/wiki/Gravity_model_of_trade

to foreign customers they might export from their country or alternatively setting up a production
plant in specific host country and serving these customers locally. Measurement distance
between a home and host country is most probably based on the distance between capital cites of
these countries.

Cultural distance differences in norms and value between the home and the

host country. Liabilities of foreigners are values, norms and beliefs which differ between people
all over the world. Those liabilities should be taken in account when we are doing company
abroad but measurement of cultural distance is really difficult. Even though it is difficult there
are some possibilities to measure it, for example by comparing the scores of a home country and
a host country on the different culture dimensions and taking the average distance along all
dimensions

Institutional distance differences in formal rules and regulations. Those

differences are not so big if countries share common history or are both member of a trade
agreement such as European Union, NAFTA, ASEAN or Mercosur. Those agreements can
provide less strict legal norms which may attract locations for multinationals. Globalization can
cause that local problem may affect globally for instance what happened in IKEA India might
very well affect sales of IKEA in Europe. In measuring institutional distance it is important to
distinguish difference between regarding type and quality of institutions.

Economic distance difference in welfare and economic development stage

between home and host country. Everyone know that average person in India is not as rich as
German so it has consequences for type of products sold in both side. Measurement of economic
distance is done by comparing the level of welfare of the home with the host country, usually as
the difference in GDP per capita.

2.4.

Porters Diamond model

A model that attempts to explain the competitive advantage some nations or groups have
due to certain factors available to them. The Porter Diamond is a model that helps analyze and
improve a nation's role in a globally competitive field. The model was developed by Michael
Porter, who is recognized as an authority on company strategy and competition; it is a more

proactive version of economic theories that quantify comparative advantages for countries or
regions.
The approach looks at clusters, a number of small industries, where the competitiveness
of one company is related to the performance of other companies and other factors tied together
in the value-added chain, in customer-client relation, or in a local or regional context.
The Porter analysis was made in two steps. First, clusters of successful industries have
been mapped in 10 important trading nations. In the second, the history of competition in
particular industries is examined to clarify the dynamic process by which competitive advantage
was created. The second step in Porter's analysis deals with the dynamic process by which
competitive advantage is created. The basic method in these studies is historical analysis.
The phenomena that are analyzed are classified into six broad factors incorporated into
the Porter diamond, which has become a key tool for the analysis of competitiveness17:

Factor conditions are human resources, physical resources, knowledge resources,


capital resources and infrastructure. Specialized resources are often specific for an
industry and important for its competitiveness. Specific resources can be created

to compensate for factor disadvantages.


Demand conditions in the home market can help companies create a competitive
advantage, when sophisticated home market buyers pressure firms to innovate

faster and to create more advanced products than those of competitors.


Related and supporting industries can produce inputs that are important for
innovation and internationalization. These industries provide cost-effective inputs,
but they also participate in the upgrading process, thus stimulating other

companies in the chain to innovate.


Firm strategy, structure and rivalry constitute the fourth determinant of
competitiveness. The way in which companies are created, set goals and are
managed is important for success. But the presence of intense rivalry in the home
base is also important; it creates pressure to innovate in order to upgrade
competitiveness.

17 http://www.valuebasedmanagement.net/methods_porter_diamond_model.html

Government can influence each of the above four determinants of


competitiveness. Clearly government can influence the supply conditions of key
production factors, demand conditions in the home market, and competition
between firms. Government interventions can occur at local, regional, national or

supranational level.
Chance events are occurrences that are outside of control of a firm. They are
important because they create discontinuities in which some gain competitive
position and some lose.

2.5.

Exports of Poland

In 2014, exports from Poland amounted to US$214.5 billion, up 36.6% since 2010.
Polands top 10 exports accounted for 59.9% of the overall value of its global shipments.
Based on statistics from the International Monetary Funds World Economic Outlook
Database, Polands total Gross Domestic Product amounted to $954.5 billion in 2014. Therefore,
exports accounted for about 22.5% of total Polish economic output. Given Polands population
of 38.6 million people, its total $214.5 billion in 2014 exports translates to roughly $5,562 for
every resident in that country. Polands unemployment rate was 8.2% in 2014.
The following export product groups represent the highest dollar value in Polish global
shipments during 2014. Also shown is the percentage share each export category represents in
terms of overall exports from Poland:
1.Machines, engines, pumps: US$27.8 billion (12.9% of total exports)
2.

Electronic equipment: $25.2 billion (11.8%)

3.

Vehicles: $22.5 billion (10.5%)

4.

Furniture, lighting, signs: $11.9 billion (5.6%)

5.

Plastics: $9.6 billion (4.5%)

6.

Oil: $8.9 billion (4.1%)

7.

Iron or steel products: $7.1 billion (3.3%)

8.

Ships, boats: $5.6 billion (2.6%)

9.

Rubber: $5.2 billion (2.4%)

10.

Iron and steel: $4.6 billion (2.1%)

Representing large initial expenditures, ships and boats were the fastest-growing among
the top 10 export categories, up 75.3% for the 5-year period starting in 2010. In second place for
improving export sales were plastics which rose 48.6%. Polish Iron or steel articles posted the
third-fastest gain in value at 43.6%18

2.6.

Romanian Exports (1991-2016)

Romania is the 50th largest export economy in the world and the 32nd most complex
economy, according to the Economic Complexity Index (ECI).
In the Romanian press the Romanian economy has been referred as the "Tiger of the
East." Romania is a country of considerable economic potential: over 10 million hectares of
agricultural land, diverse energy sources (coal, oil, natural gas, hydro, nuclear and wind).
Romania's main exports are agricultural and food products ,wines and alcoholic drinks , wood
products,

textiles and leather , industrial machinery, electrical and electronic equipment,

metallurgic products, cars , software, pharmaceuticals, fine chemicals. 19


Exports in Romania decreased to 4751.90 EUR Million in November from 4990.90 EUR
Million in October of 2015. Exports in Romania averaged 1822.44 EUR Million from 1991 until
2015, reaching an all time high of 5041.60 EUR Million in July of 2015 and a record low of
143.20 EUR Million in February of 1991. Exports in Romania are reported by the Institutul
National de Statistica20.
Romania exports mostly machinery and transport equipment, raw materials, and
miscellaneous manufactured articles like textiles and footwear. Romania main exports partners
18 http://forsal.pl/artykuly/899144,polski-eksport-mocno-w-gore-import-tez-rosniegus-podal-najnowsze-dane.html
19 http://www.romania-export.com/
20 http://www.tradingeconomics.com/romania/exports

are other European Union members with Germany, Italy, France and Hungary being the most
important, but also with Turkey. 21
In 2013 Romania exported $66.7B, making it the 50th largest exporter in the world.
During the last five years the exports of Romania have increased at an annualized rate of 7.3%,
from $47B in 2008 to $66.7B in 2013. The most recent exports are led by Cars which represent
8.06% of the total exports of Romania, followed by Vehicle Parts, which account for 6.26%22.

Used
Sources:
1. Trade policy
http://www.businessdictionary.com/definition/trade-policy.html
2. Commercial Policy
https://en.wikipedia.org/wiki/Commercial_policy
3. Commercial Policy
http://www.investopedia.com/terms/c/commercial-policy.asp#ixzz3xG90xnJ1
4. Definition of Trade Restriction
21 http://atlas.media.mit.edu/en/profile/country/rou/
22 http://atlas.media.mit.edu/en/profile/country/rou/#Exports

http://www.ehow.com/info_8628190_definition-trade-restrictions-economics.html
5. Trade restrictions
http://www.investopedia.com/exam-guide/cfa-level-1/global-economic-analysis/traderestrictions.asp
6. Define the different types of trade barriers
http://www.econmentor.com/hs-georgia/international-economics/ssein2/define-trade-barriers-astariffs-quotas-embargoes-standards-and-subsidies/text/1699.html#Define the different types of
trade barriers
7. Libby Rittenberg and Timothy Tregarthen Principles of Microeconomics, v. 1.0
http://catalog.flatworldknowledge.com/bookhub/21?e=rittenberg-ch17_s04
8. Regional Trading Agreements
http://intl.econ.cuhk.edu.hk/topic/index.php?did=14
9. Country Profile - Romania-Imports
http://www.tradingeconomics.com/romania/imports
10. Country Profile - Romania-Imports
http://atlas.media.mit.edu/en/profile/country/rou/#Imports
11. Country Profile Romania
http://atlas.media.mit.edu/en/profile/country/rou/
12. Polish Export
http://forsal.pl/artykuly/899144,polski-eksport-mocno-w-gore-import-tez-rosnie-gus-podalnajnowsze-dane.html
13. Factors Affecting Freight Demand
http://www.tongji.edu.cn/~yangdy/quick/ch2.htm#6
14. OECD - Trade costs
http://www.oecd.org/tad/benefitlib/trade-costs.htm
15. International Trade Gravity Model

http://www.economywatch.com/international-trade/gravity-model.html
16. Gravity model of trade
https://en.wikipedia.org/wiki/Gravity_model_of_trade
17. Methods Porter Diamond Model
http://www.valuebasedmanagement.net/methods_porter_diamond_model.html
18. Poland Exports
http://forsal.pl/artykuly/899144,polski-eksport-mocno-w-gore-import-tez-rosnie-gus-podalnajnowsze-dane.html
19. Romania Exports Official website
http://www.romania-export.com/
20. Country Profile Romania Exports
http://www.tradingeconomics.com/romania/exports
21. Country Profile Romania
http://atlas.media.mit.edu/en/profile/country/rou/
22. Country Profile Romania- Exports
http://atlas.media.mit.edu/en/profile/country/rou/#Exports