International Business

Sixteenth Edition, Global Edition

Chapter 6
Trade Protectionism

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Learning Objectives (1 of 2)
6-1 Recognize the conflicting outcomes of trade
protectionism
6-2 Assess governments’ economic rationales and
outcome uncertainties with international trade
intervention
6-3 Assess governments’ noneconomic rationales
and outcome uncertainties with international
trade intervention

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Learning Objectives (2 of 2)
6-4 Describe the major instruments of trade
control
6-5 Classify how companies deal with
governmental trade influences

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What is Protectionism?
Objective 6-1
• What is protectionism?
• Governmental actions to influence international trade are
known as protectionism.
• Why do governments intervene in trade?
• Despite free-trade benefits, governments intervene in trade
to attain economic, social, or political objectives

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What is Protectionism?
Objective 6-1
• Stakeholders and protectionism:
• Proposals on trade regulations often spark fierce debate
among people who believe they will be affected—the so-
called stakeholders. Of course, those most directly
affected are most apt to speak out, such as workers,
owners, suppliers, and local politicians whose livelihoods
depend on the actions taken.

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Institutional Factors Affecting the Flow of Trade
Objective 6-1
Figure 6.1 Institutional Factors Affecting the Flow of Goods and Service

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Economic Rationales for Trade Restrictions
Objective 6-2

• 1- To fight unemployment
• 2- To protect infant industries
• 3- To develop an industrial base
• 4- Economic relationships with other countries

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Economic Rationales for Trade Restrictions
Objective 6-2

• 1- Import restrictions to create domestic employment:

• may lead to retaliation by other countries,
• affect large and small economies differently,
• reduce import handling jobs,
• may decrease jobs in another industry, or
• may decrease export jobs because of lower incomes abroad.
• 2- The infant-industry argument says that production becomes
more competitive over time because of:
• increased economies of scale, and
• greater worker efficiency.

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Economic Rationales for Trade Restrictions
Objective 6-2
• 3- To develop an industrial base: Since the Industrial
Revolution, countries increasing their industrial bases grew
their employment and economies more rapidly. This
observation led to protectionist arguments to spur local
industrialization.
• These arguments have been based on the following
assumptions:
• Surplus workers can increase manufacturing output more
easily than agricultural output.
• Import restrictions lead to foreign investment inflows, which
provide jobs in manufacturing.
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• Prices and sales of agricultural products and raw
materials fluctuate widely, which is a detriment to
economies that depend heavily on them,
especially if the dependence is on just one or a
few commodities.
• Markets for industrial products grow faster than
markets for both agricultural and raw material
commodities.

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Economic Rationales for Trade Restrictions
Objective 6-2

• 4- Economic Relationships with other countries:

Nations monitor their absolute economic situations and
compare their performance to other countries. Among their
many practices to improve their relative positions, four
stand out: making balance-of-trade adjustments, gaining
comparable access to foreign markets, using restrictions as
a bargaining tool, and controlling prices.

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Why Government Intervenes in Trade
Objective 6-2
Table 6.1 Why Governments Intervene in Trade

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Noneconomic Rationale for Trade Restrictions
Objective 6-3

• 1. Maintain essential industries

• 2. Promoting acceptable practices abroad
• 3. Maintain or extend spheres of influence
• 4. Preserve national culture

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 Noneconomic Rationale for Trade Restrictions

• 1. Maintain essential industries:

• not dependent on foreign supplies during hostile political
periods.

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Noneconomic Rationale for Trade Restrictions

• 2. Promoting acceptable practices abroad

• Governments limit exports, even to friendly countries, of
strategic goods that might fall into the hands of potential
enemies. They also limit exports and imports to compel
a foreign country to change some objectionable policy
or capability. The rationale is to weaken the foreign
country’s economy by decreasing its foreign sales and
by limiting its access to needed products.

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Noneconomic Rationale for Trade Restrictions

• 3. Maintain or extend spheres of influence

• Governments use trade to support their spheres of
influence—giving aid and credits to, and
encouraging imports from, countries that join a
political alliance or vote a preferred way within
international bodies.

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Noneconomic Rationale for Trade Restrictions

• 4. Preserve national culture :

• To help sustain a collective identity that sets their
citizens apart from other nationalities,
governments prohibit exports of art and historical
items deemed to be part of their national heritage.
In addition, they limit imports that may either
conflict with or replace their dominant values.

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Instruments of Trade Control: Tariffs
Objective 6-4
• Tariff (Duty)
• Why are Tariffs levied?
• Types of Tariffs

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Instruments of Trade Control: Tariffs
Objective 6-4
• Tariff barriers directly affect prices, and nontariff barriers may directly
affect either price or quantity. A tariff (also called a duty) is a tax
levied on a good shipped internationally. That is, governments charge
a tariff on a good when it crosses an official boundary— whether it be
that of a nation or a group of nations that have agreed to impose a
common tariff on goods crossing the boundary of their bloc.
• Tariffs may be levied:
• on goods entering, leaving, or passing through a country,
• for protection or revenue, or
• on a per-unit basis, a value basis, or both.
• A tariff assessed on a per-unit basis is a specific duty, on a percentage of the
item’s value an ad valorem duty, and on both a compound duty

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Instruments of Trade Control: Non-tariff
Objective 6-4

• Subsidies
• Aids and Loans
• Quotas
• Embargo
• Buy Local Legislation
• Standards and Labels
• Specific Permission Requirements
• Administrative Delays
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Instruments of Trade Control: Non-tariff
Objective 6-4

• Subsidies–Definition:
• Subsidies offer direct assistance to companies to
boost their competitiveness. Although this
definition is straightforward, disagreement on what
constitutes a subsidy causes trade frictions. In
essence Governmental subsidies may help
companies be competitive.

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Instruments of Trade Control: Non-tariff (1 of 3)
Objective 6-4

– Agriculture Subsidies:
Agricultural subsidies are difficult to dismantle.
Especially to overcome market imperfections because
they are at least controversial.
The one area in which everyone agrees that subsidies
exist is agriculture, especially in developed countries.
The official reason is that food supplies are too critical
to be left to chance.
Although subsidies lead to surplus production, they are
argued to be preferable to ©the
Copyright 2018 risk
Pearson of food
Education shortages.
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Instruments of Trade Control: Non-tariff (1 of 3)

• Aid and Loans: When governments require

foreign aid and loan recipients to spend the funds
in the donor country, a situation known as tied aid
or tied loans, some otherwise noncompetitive
output can compete abroad. For instance, tied aid
helps win large contracts for infrastructure, such
as telecommunications, railways, and electric
power projects.

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Instruments of Trade Control: Non-tariff (1 of 3)

• A quota limits the quantity of a product that can

be imported or exported in a given time frame,
typically per year. Import quotas normally raise
prices because they (1) limit supplies and
• (2) provide little incentive to use price competition
to increase sales. A specific type of quota that
prohibits all trade is an embargo.

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Instruments of Trade Control: Non-tariff (1 of 3)

• Buy local legislation sets rules whereby

governments give preference to domestic production
in their purchases.

• Standards and Labels: Countries can devise

classification, labeling, and testing standards to allow
the sale of domestic products while obstructing
foreign-made ones.

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Instruments of Trade Control: Non-tariff (1 of 3)

• Specific Permission Requirements: Countries

may require that importers or exporters secure
governmental permission (an import or export
license) before transacting trade.

• Administrative delays: Closely akin to specific

permission requirements are administrative
customs delays that may be caused by intention
or inefficiency.

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Instruments of Trade Control: Non-tariff (3 of 3)
Objective 6-4

• Service Industries
– Four factors to consider
 Essentiality
 Not-for-Profit Services
 Standards
 Immigration

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How Companies Deal with Governmental
Influences
Objective 6-5
• Threats from import competition
– Options for companies:
• Move operations to another country.
• Concentrate on market niches that attract less
international competition.
• Adopt internal innovations, such as greater efficiency or
superior products.
• Try to get governmental protection.

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Activity Minute:
Of these, which do you think is the best option for
companies? Does it depend on the industry?

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