LECTURE No.

27 SUMMARY
Trade Barrier Tools (Continue)
INTERNATIONAL BUSINESS
Prepared by: Imran Khan
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In this lecture, trade barrier tools practiced in International business have been
discussed to find out how these tools are used to achieve different political objectives.
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Political arguments for intervention:

There are political arguments that why a country should use these trade barriers.
One of strong argument is to support local economy, producers, consumers, small and
medium size industry, farmers and certain group.This is done for overall betterment of
country.

 Protect industry and Job.

 Retaliation
 Protect human right
 Further Foreign policy objectives
 Protect consumer

Protect industry and Job.

Most common and important argument is to protect industry and job.

In free trade, there is more flow of imported goods and competition increase for local
producers. To compete on cost local companies may start downsizing, fire employees or
shift production abroad to decrease cost and thus greater chance of unemployment.
However, if local industry grows, there will be better chance to create employment and
people will feel secure.
USA imposed local content requirement for Japanese top two car manufacturers. USA
offered import quota restriction to protect local industry but at the end, consumers were
paying $1billion every year due to high demand of Japanese cars and Japanese car
manufacturers increased prices keeping in view the demand. They know at end USA has
to over lift the ban and will ask to establish plants in USA. This trend continued for 8
years and thus USA consumers paid almost $8 billion, which was quite big amount
therefore, USA asked Japanese auto manufacturers to establish plant locally.

Retaliation

Retaliation is a quite risky strategy. If government fails to heed warnings and imposes its
own higher tariffs, the result is higher tariff all around and corresponding economic loss.

China was a huge market for making copies of movies, videos, songs, softwares, branded
goods and world famous logos and video games etc. USA lost millions of dollars in form
of intellectual property rights in software and computer industry. USA government first
observed how much China is serious to overcome this challenge. After realizing that
China was becoming hub of infringement materials which were distributed worldwide so
it warned China that if China did not take serious actions to crack down these copy right
violator then USA has no option but to increase tariff on China imports and may
completely ban imports. This strategy worked due to retaliation strategy adopted by USA.

US Sanctions:
Pakistan, Afghanistan, Iran, Syria, Yugoslavia, China, Cuba, India and so many other
countries were partially banned/sanctioned, imposed tariff due to retaliation strategy by
USA.

Protecting Consumers:

There has remained contradiction about any biotechnological invention or new

medication for non-curable disease or even genetically altered crops usage. Some has
considered these inventions quite useful and other protested against these drugs and
inventions on the grounds of consumer protection.
Tomato could not be grown in cold areas. Scientists discovered antifreeze element
through genetic engineering and was successful in snowy cold areas. Another
improvement was that normal bugs could not easily target this kind of tomato as its
resistance power has been improved and after several attacks, tomato could be infected.
When this kind of seed was tried in Austria, it was strongly rejected by Austrian grounds.
The point behind this refusal was that Austrians were quite sensitive about its local
people and was of the view that such seeds may become source of super bugs and able to
harm tomato quite easily. Another concern was that scientist might not have researched
its long-term effects and have considered short-term benefits. As in long term, these
altered crops may result in cancer and other fatal diseases. Finally, Austrian government
banned import of these genetically altered seeds for the sake of consumers.

Similarly, in USA Federal drug authority is quite strict about certain drugs which it thinks
may have harmful effect on consumer in the long run. Same is the case with autos that
not all autos can be imported due to carbon emission standard. This standard was raised
to make best efforts in the provision of fresh and clean air.

Further Foreign Policy Objectives:

Trade barriers can also be used to affect foreign policy objectives. This factor could be
used to build relationship with other country or punishes it (so called rogue states). As
policy is unilateral so can be easily defeated buy other countries by ignoring it. To
achieve foreign objectives sanctions may be used as a tool. China is becoming a large
economy and is threatening to USA economy. After realizing that China economic power
cannot be challenged so to improve relationship with China, USA gave it a “MFN”
status. Now trade relations between these countries are quite good and major US
companies have invested in China.

USA relations with Cuba remained stringent and become worsened after Cuban
revolution. Rather than relying on USA, Cuba developed relationship with Mexico and
Canada and was progressing. Canadian companies also invested a lot in Cuba and set up
business over there. USA tried to weaken this business relationship by introducing Hans
Burton law. According to this law if all those companies, which were confiscated during
Cuban revolution, still operating business over there, these companies can be sued under
American laws. As this law was quite unfair and no USA law can be imposed on non-
American nationals so it was never enforced in practice. Summarizing this it can be
concluded that trade policies can be affected by foreign policies objectives and a country
relationship with other country can be improved or weakened under the foreign policy
directions.
 LECTURE No.28 SUMMARY
Trade Barrier Tools (Continue)
INTERNATIONAL BUSINESS
Prepared by: Imran Khan
_______________________________________________________________________
_

In this lecture, the human right role in protecting local industry of a country and
Economic arguments to protect local industry practiced in International business has
been discussed.
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Protect Human Rights:

One of serious issue raised during globalization is the human rights. Human right
activists have been blaming MNC’s for exploiting child labor and workforce of
developing countries for cheap production. China is hub of cheap labor and all giant
companies are using Chinese labor for cheap productions. These activists are raising
voice to provide basic needs of children like education and work in safe environment. As
an American company may be paying $9 per hour to USA labor while in developing
countries it might be paying 50- 90 cents per hour. USA demanded from China to
improve human rights condition and in return, China will be given “Most Favored
Nation” (MFN) status. China started working on this and tariff was reduced from 40% to
8% and even less than that. China did not improve this human right violation condition
under WTO influence as at that time China had not signed WTO.

Economic Arguments for Intervention:

 Infant Industry Protection:
 Strategic Trade Policy:
Infant Industry:

It is an oldest economic argument for government intervention dated back to 1792 and
Alexander Hamilton.
The main logic behind this argument is to protect developing country’s new industry and
from developed countries better established industries. This phenomena being recognized
by GATT.

Different economists support this strategy however other criticize on the grounds that
infant industry should be protected for a certain period and when it becomes financially
strong, industry should be made independent and should not be treated like an infant all
time. If industry keeps getting support from government in form of subsidies then
internally industry may become so weak to stand on its own feet. The good example is
Brazil auto industry, which was considered in top ten auto industries of the world.
However, when government support was raised after feeding on subsidies for 30 years it
was found out that it was one of inefficient industries in the world. Another objection was
on the criteria for issuing loan to support these infant industries. As no performance
measures been done to evaluate how much capability this industry has to recover after
getting loan.

Strategic Trade Policy:

It can help a firm gain ”first mover advantages” or overcome barriers created by different
(foreign) first mover.

USA plane manufacturer (Boeing) got edge and become first mover advantages due to
highly skilled workforce. USA was having good background due to expertise in fighter
jet manufacturing. It holds market better than UK, France, Germany joint consortium
(Airbus manufacturers).
Similarly, in semi conductor industry USA government has given 100 million dollar
subsidy to 14 companies’ consortium. As semiconductors were mostly installed in
sensitive areas like defense equipment so USA was relying on local manufacturers. In
1996 a giant company emerged which developed microprocessor with economies of
scale. After that, USA started relying on this company for this microprocessor.

The situation is not always favorable for a pioneer company as a new entrant might get
edge on pioneer company due to better technology and economies of scale. USA was
LCD and semiconductor inventor and pioneer, but Japan increased import barriers and
forced local manufacturer to use local semiconductors. In this way, Japan got first mover
advantage by these financial interventions. Japan set up manufacturing plants in
Thailand, Singapore to get economies of scale and get edge on USA manufacturers. This
strategy worked and USA manufacturers started importing LCD and semiconductors
from Japan to install in their desktops and laptops.

Revised case for Free Trade:

Paul Krugman, an MIT economist, argues that strategic trade policies can lead to wars.
The best way to handle dispute is to work to establish rules that minimize trade distorting
subsidies- a function of World Trade Organization.

Paul studied airbus and Boeing case and concluded that both companies are relying on
their respective government subsidies. Their market share fluctuates depending on the
level of subsidies. In start, Airbus was holding 5% market share of passenger aircraft,
which increased to 40%.

Paul argues that this subsidy money should be spent on good cause like drug for un
curable diseases. This war of protecting specific industry may continue and can only end
if there is a governing body to monitor these kinds of activities. He emphasized the role
of WTO, which can provide proper guidelines and direction for fair trade policies. He
ultimately gives clues about free trade policy in which government role is minimal.
He also emphasized that this kind of loan should be provided based on performance
evaluation. If money is invested without evaluation then it may not able to compete on its
own if left alone.

Another factor he highlighted that normally countries restrict trade and increase tariff due
to mistrust element. Each country is in doubt that if it soften tariff and trade policies other
country may try to misuse it for its own purpose. Therefore, he again supported his theory
about role of WTO as watchdog so that no country should misuse these policies. If
countries keep trying to protect local industry then this will be an endless war and only
taxpayer will be suffering at end. |This war can only end if each country follows WTO as
a referee.

He also argues that government intervention usually favors special interest group that
distort subsidy to their own ends.

Subsidy is misused to favor certain group. Like agricultural reforms are done to get vote
of farmers in certain areas.

Therefore a blanket policy for free trade with exceptions granted under extreme pressure
maybe the best policy that a country likely to get.

Paul further explained his viewpoint that no free trade will be in its true essence if
government also practicing trade barriers as tools to support local industry. So only that
policy will be quite useful for a country which is favoring free trade.

Development of World Trade system:

The history of World trade is quite vast, old, and different factors and economists played
major role in development of world Trade System. Following are main factors, which
supported this.
  Intellectual arguments for free trade.
 Adam Smith and Ricardo
 Free trade as government policy
 Britain’s (1846) repeal of the Corn Laws.

Interesting to mention here that Britain was quite conservative regarding free trade in 19 th
century. Britain farmers were growing Corn and Britain government was supportive of
Corn growers. It initiated different action like increased corn import tariff to save Corn
crop. However, situation did not remain same and Corn crop was damaged in the
following years, which forced government to think about importing Corn. As tariffs have
been increased and corn import become quite expensive. A debate started in parliament
how to handle the situation. David Ricardo was member of that parliament and was
against this import. He proposed to change trade policy and follow free trade rather than
restricted trade. In this way, a positive move started about free trade idea.

In the following lecture, this will be discussed in more detail.