L A N OIT

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THE POLITICAL

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INTERNATIONAL
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TRADE
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AFRODINDA INTAN 201960294 S I
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 IO NAL B
AT U

NR

I SSENIS
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T N II S U B

TN
LA E

WHAT IS THE POLITICAL NO I TANR

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
10 —
 T IONAL B
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— 02

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NO I TANR

INSTRUMENTS OF TRADE POLICY

01 — Tariifs baries : the tariff
02 — Non-tariff barriers NTB :
Subsides
Import Quotas
Voluntary Export Restraints
Local Content Requirements
Administrative Polices
Standards
Antidumping Policies
Etc
 T IONAL B
N A

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— 03

TN
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B
E
NO I TANR
TARIFFS - the oldest
form of trade policy
They are taxes levied on imports that effectively raise
the cost of imported products relative to domestic
products. They drive a wedge between the
international (import) price and the domestic price.
two kinds:
Specific (sp) tariffs
PD = PINT + tsp

Ad valorem (av) tariffs

PD = PINT + tav* PINT = = (1 + tav) * PINT
 A
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T IONAL B

LA
N A

ECONOMIC EFFECTS OF

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S
— 04

TN
N I

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S SE A TARIFF

TN
LA

B
E
I NO I TANR
TN

Good for the Good for Bad for

government domestic consumers
dna tpecnoC —

dna tpecnoC —

dna tpecnoC —
(increase protected
noitinifeD

noitinifeD

noitinifeD
revenues) producers.
N T
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— 05

ECO EFFECT
of a tariff (big
country case)

tsp ↑ → PINT↓
→ PD↑
→ QD ↓
→ QS ↑
→ IMP ↓
→ GR ↑
 eco effect of tariff:
— 06
small country case L
ART
S —
E

L E D I STSA
U A
The effect of a tariff in a “small country” are similar to those

S I V YME
in a “big country”, but for the fact that the international price
DA
doesn’t change.

AE
CA I NRGN

As a consequence, it is possible to show that country's

economic welfare is reduced by the introduction of a tariff.
 T IONAL B
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HOW DO GOVERNMENTS

TN
LA

B
E
NO I TANR

INTERVENE IN
MARKETS?
Subsidies - government payments
to domestic producers

Subsidies help domestic producers

compete against low-cost foreign imports
gain export markets
70 —

Consumers typically absorb the costs of subsidies

 T IONAL B
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HOW DO GOVERNMENTS

I SSENIS
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INTERVENE IN

TN
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B
E
NO I TANR

MARKETS?
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
80 —

A quota rent
the extra profit that producers make when supply is artificially limited by
an import quota
 T IONAL B
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HOW DO GOVERNMENTS

I ISU

TN
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B
E
NO I TANR

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

90 —

benefit domestic producers

raise the prices of imported goods
 IONAL B
HOW DO GOVERNMENTS A T
N

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I SSENIS
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INTERVENE IN

I ISU

TN
LA

B
E
MARKETS? NO I TANR

Local Content Requirements - demand

that some specific fraction of a good be
produced domestically

benefit domestic producers

consumers face higher prices

Administrative Policies - bureaucratic

rules designed to make it difficult for
01 —

imports to enter a country

polices hurt consumers by limiting choice

 IONAL B
HOW DO GOVERNMENTS A T
N

U
I SSENIS
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INTERVENE IN

I ISU

TN
LA

B
E
MARKETS? NO I TANR

Antidumping Policies – aka countervailing

duties - 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
11 —

foreign markets
maybe predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors
out of that market, and then later raise prices
 T IONAL B
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There are two main arguments

stnemnrevoG

I ISU
for government intervention in

TN
LA

B
E
NO I TANR
the market

nI enevretnI
?stekraM
Political arguments
concerned with protecting the interests of certain groups
oD yhW

within a nation (normally producers), often at the expense

of other groups (normally consumers)

Economic arguments

21 —
concerned with boosting the overall wealth of a nation –
benefits both producers and consumers
 T IONAL B

WHAT ARE THE N A

U
I SSENIS
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— 13

TN
POLITICAL ARGUMENTS

I ISU

TN
LA

B
E
FOR GOVERNMENT NO I TANR

INTERVENTION?

Protecting jobs Protecting industries deemed Retaliation for unfair

important for national security foreign competition -
the most common political reason for
- industries are often protected when governments take or threaten to
trade restrictions
because they are deemed important take specific actions, other countries
results from political pressures by
for national security may remove trade barriers
unions or industries that are
aerospace or semiconductors if threatened governments do not
"threatened" by more efficient foreign
producers, and have more political back down, tensions can escalate
clout than consumers and new trade barriers may be
enacted
risky strategy
 T IONAL B

WHAT ARE THE N A

U
I SSENIS
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— 14

TN
POLITICAL ARGUMENTS

I ISU

TN
LA

B
E
FOR GOVERNMENT NO I TANR

INTERVENTION?

Protecting consumers from Furthering the goals of Protecting the human rights of
“dangerous” products foreign policy individuals in exporting
countries

t limit “unsafe” products preferential trade terms can be

Protecting the environment
– international trade is associated
with a decline in environmental quality
concern over global warming
enforcement of environmental
regulation
granted to countries that a the decision to grant China MFN
government wants to build strong status in 1999 was based on this
relations with: philosophy
trade policy can also be used to
punish rogue states
the Helms-Burton Act and the
D’Amato Act, have been passed
to protect American companies
from such actions
 S —
ART E

ROF STNEMUGRA
L
TARIFF IN A BIG COUNTRY (TERMS OF TRADE

L E D I STSA
A U S
ARGUMENT)

I V YME
?NOITNEVRETNI
as seen before, a proper tariff might increase national welfare in a big country
DA

AE
EHT ERA TAHW
CA GN I NR

TNEMNREVOG
THE INFANT INDUSTRY ARGUMENT
the industry should be protected until it can develop and be viable
CIMONOCE
and competitive internationally

When is an industry “grown up” ?

Critics argue that if a country has the potential to develop a viable competitive
position, its firms should be capable of raising necessary funds without additional
support from the government

51 —
STRATEGIC TRADE POLICY
first-mover advantages can be important to success :
governments can help firms from their countries attain these advantages
governments can help firms overcome barriers to entry into industries where
foreign firms have an initial advantage
— 16

Revised Case
For Free Trade T I O N A L B
N A

S U
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NI
T
Restrictions on trade may be

I SSE
N I ISU
inappropriate in the following
cases:

TN
LA

B
R E
NOITAN
Retaliation and Trade War
Domestic Politics (lobbies activity)
Lack of information
 T IONAL B
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B
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NO I TANR

Retaliation And
Trade War

Paul Krugman argues that

strategic trade policies aimed
at establishing domestic firms
in a dominant position in a
global industry are beggar-thy-
neighbor policies that boost
national income at the
expense of other countries
 IONAL B
— 18 A T
N

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I ISU
Domestic Policies

TN
LA

B
E
NO I TANR

Krugman also argues that since special

interest groups can influence
governments, strategic trade policy is
almost certain to be captured by such
groups who will distort it to their own ends

Lack of information
in many cases, the government doesn’t have the
necessary set of precise information to design and
implement the policy correctly
 T IONAL B
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GATT/WTO

One basic principle: Non-discrimination

Two applications of this principle
Most favoured nation clause
National treatment clause
 T IONAL B
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Why do we need the GATT/WTO ?

01 — The creation of GATT allowed to solve a sort of prisoner dilemma.

02 — In fact, international negotiations can help to avoid a trade war
03 — This is a non-cooperative game. The only Nash equilibrium is
“Protectionism-Protectionism”
04 — Note: both country would be better off in the “Free trade-Free
trade” situation (prisoners’ dilemma), but this cannot be an equilibrium
given the characteristics of this game
 T IONAL B
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B
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WHAT IS THE FUTURE

OF THE WORLD TRADE
ORGANIZATION?
The WTO has become a magnet for
various groups protesting free trade
The current agenda of the WTO focuses
on
The WTO launched a new round of talks
12 —

at Doha, Qatar in 2001

 A
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WHAT DO TRADE BARRIERS — 22

TN
N I

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S SE
MEAN FOR MANAGERS?

TN
LA

B
E
I NO I TANR
TN

Trade barriers Voluntary export To conform to local

restraints (VERs) may content requirements, a
raise the cost of
firm may have to locate
dna tpecnoC —

dna tpecnoC —

dna tpecnoC —
limit a firm’s ability to
exporting more production
serve a country from
products to a activities in a given
noitinifeD

noitinifeD

noitinifeD
locations outside that
country market than it would
country otherwise
N T
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