LECTURE No.

26 SUMMARY
Trade Barrier Tools (Continue)
INTERNATIONAL BUSINESS
Prepared by: Imran Khan
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In this lecture, the political economy and different trade barrier tools practiced in
International business has been discussed.
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Following seven instruments are widely used to protect local industry, economy or
interest of the nation.

i. Tariff
ii. Subsidies
iii. Local Content Requirements
iv. Anti Dumping Duties
v. Administrative Policies
vi. Import Quotas
vii. Voluntary Export Restraints

Tariff, subsidies, import quotas, and voluntary export Restrictions have been discussed in
previous lecture.
Import quotas can be specific quotas that can be imported only in certain quantity.

Voluntary Export restraints:

In this case, imported country instructs exporter that how much export is possible. The
best example to understand this concept is issue of Japanese car export to the USA.
In 80’s, USA allowed Japanese car manufacturers that they can export 1.48 million cars
annually. In the following year, it was increased to 1.68 million cars and in the
subsequent year, it was increased to 1.85 million cars. During that period, Japan was
keeping close eye on these international trends and was working on parallel policies to
find ways to increase volume of car export. Finally, USA agreed to abolish this quota
policy and gave free hand to Japanese car manufacturers to export cars. However, Japan
was quite happy to maintain the same number of car export and at same time was
working on quality improvement of cars. This policy was quite successful as Japanese car
become popular in USA due to quality improvement and Japanese carmakers earned high
profit after they increased prices of car rather than increasing quantity of export. If
Japanese have increased number of export this might have devalued the Japanese
currency and in long run they might not have earned such profit which they did by
maintaining same number of export.

Local Content Requirement:

A specific fraction of a good must be manufactured domestically. This fraction could be

in form of physical amount or value.

For example, if one is importing motorbike or vehicle then government, impose

restriction to manufacture 75% of the components in country. In other form, 75% of
component value must be locally manufactured.

This tool is used in both developing and developed countries. The developing countries
impose this restriction to develop local manufacturing base while developed countries do
this to protect local jobs and industry from foreign competition.

In 1989 and 1998 recession, 79,000 people were laid off in USA in big enterprises.
However, on otherside small enterprises employed 249,000 during the same period who
were working in vendor sector. Therefore, the basic idea of local content requirement is
to protect jobs of local people. In developing countries, local industry is mostly vendor-
based industry and based on sub assembling so these countries try to use local content
requirement law to protect and support local industry.
Thailand required all milk products must contain atleast 50% milk from local dairy
farmers. Similarly, NAFTA requires 62% local content for all cars coming from members
countries.

One of disadvantages of local content Law is that producer might have to buy expensive
components from local market, which they could buy cheaply from foreign market, and
ultimately customer has to pay high price.

Administrative Policies:

Bureaucratic rules have been designed to make it difficult for imported goods to enter a
country. This is kind of tool in which a country does not clearly reject imports from
another country/ies but policies are designed in such ways that it becomes difficult both
operationally and economically to continue export to the importing country. In this regard
Japanese ‘masters’ in imposing rules. There are two famous cases interesting to quote.
 Tulip bulbs
 Courier service

Netherlands (Holland) is one of world’s largest flower exporter and is famous for best
quality tulip grower. It exports to every corner of the world except Japan. The reason was
that once it exported tulip to Japan and when reached at airport custom authority they
started cutting flower in centre and pointed out that this is done in order to find out any
objectionable item is not covered up in flower. As flower was of no use after cutting so
Netherlands flower exporter stop the export.
In this way, Japanese custom policies discourage Netherlands exporters although there
was no ban on flower imports in Japan.

In another example, a courier company, which is operating and providing services to

almost every country of the world, faced unpleasant experience in Japan. The courier
company was quite famous for providing quick and excellent services to clients. Once it
started services in Japan, it found out that Japanese custom authority checking is quite
strict and sometime unnecessary. Whenever a shipment arrived at Japanese custom
authorities, they opened the packets/shipments under the excuse that this was done to
avoid delivery of any kind of objectionable items. In this way, a shipment, which was
promised to be delivered in four days, might have been delivered in ten days due to these
checking. This was creating a negative image about the company and was inconsistent
with its normal delivery standards. Therefore, company has to withdraw its operations
from Japan. In this way Japan, discourage a foreign courier company through its
administrative policies and supported local courier companies without imposing ban on
foreign companies.

France is also quite conservative in this aspect and support local national companies
through different means. French government introduced strict rules regarding Video
recorder import to support local national video recorder manufacturers. It introduced
manual procedure to handle imported video recorder, which was normally done through
quick digital process. In this way, the delivery process increased and foreign video
exporters could not meet demand on time.

Antidumping policies:
Antidumping strategy is used in different ways:
 Selling goods into a foreign product below production cost.
 Selling below fair market value’
 Used to unload excess production
 Using predatory pricing

A Korean company produced semiconductors in bulk quantity and could not sell in local
market. Therefore, company sold semiconductors in USA below the cost of production to
get revenue atleast. US companies could not offer the semiconductors at same price and
have to withdraw business in that area. In this way Korean semiconductor got hold in US
major market. As a last resort, US companies filed a complaint in US concerned
departments. US concerned department investigated the matter and it was found out that
Korean companies dump the semiconductors which affected the local manufacturers and
2 -3 % duties were levied on Korean semiconductor manufacturer.
Ethically it is not good to sell products at such low prices but this trend will continue for
sometime, as at moment it is hard to understand WTO culture.
 Anti dumping duties are used to punish foreign firms.
 Protect local industry from unfair practices.
 Impose countervailing duties.

Political arguments for intervention:

There are political and economic arguments to support this intervention.

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
 National security
 Further Foreign policy objectives
 Protect consumer

Many economists have come to different conclusions that why a political set up of a
country discourage foreign investment. Apparently, every country favors free trade but
actually, every country prefers to grow and support local industries. 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. The
second reason is to retaliate against opposing partner. Countries may also use these trade
barrier tools as a retaliation technique if they believe that a trading partner has not
followed rules. For example, France wine is famous all over the world and if France
believes that the United States has allowed its wine producers to call it’s domestically
produced sparkling wines "Champagne" (a name specific to the Champagne region of
France) for too long, so as a retaliation technique, it may levy a tariff on imported meat
from the United States. If some actions have been taken by U.S. to discourage this
improper labeling, France is likely to stop its retaliation. Retaliation can also be used if a
trading partner goes against the government's foreign policy objectives.