AJAGEB.09

Government Influence on Trade(The Political Economy of International Trade) All countries seek to influence trade - none permits an unregulated flow of goods and services across its borders. Government

influence is exerted, in general, for economic, political or social objectives. Often these objectives are in conflict!

Concerned

groups/ interest groups/ pressure groups.

Common Rationale for Government Influence: Unemployment

(protecting, saving, creating, jobs!)

Import restrictions to protect domestic jobs: May lead to retaliation by other countries May decrease export jobs because of lower incomes abroad Are less likely to be met with retaliation if implemented by small economies May lead to polarization in the society: i.e. it may foster diametrically opposed, often antagonistic groups, viewpoints, etc.

Possible Costs of Import Restrictions: If import restrictions result in a net increase in domestic employment, there will still be costs to some groups in the society in the form of: Higher prices Higher taxes Compare the distress suffered by those who must be out of work, change jobs, or move with workers who must pay higher taxes to help support people whose positions are lost.

Infant-Industry ArgumentThe infant-industry argument holds that an emerging industry should be guaranteed a large share of domestic market until it becomes mature and efficient enough to compete against importsThe logic here is that production becomes more competitive over time because of: Increased economies of scale Greater workers efficiency (learning effect)

One Problem - How to identify industries that will profit from government protection! On one hand, government protection for the auto industry in Brazil, and South Korea has met with success. On the other hand, government protection for the auto industry in Australia and Argentina has been a failure. Other Problems - Should some segments of the economy absorb the higher costs of local production during infancy? Or - Should such costs be borne by entrepreneurs? For the infant-industry argument to be valid future benefits must exceed early costs (to the society/economy)

Industrialization ArgumentCountries seek protection (from competition) to promote industrialization because industrialization

Brings faster growth than agriculture Attracts inflow of foreign investments Diversifies economic activities Ensures greater real earnings for the labor force (since prices of manufactured goods tend to rise faster than prices of primary products)

The

industrialization argument holds that if freemarket conditions prevail, then the importation of cheaper products from abroad will prevent or hinder the establishment of domestic industries.

Many

countries adopt Industrial Policy under which industries are selected to receive favorable government treatment.problem is that the choice of industries to receive government largesse may depend on domestic political clout of those industries rather than on their potential international competitiveness

The

Marginal Returns from AgricultureIn many LDCs, there are lots of marginally employed workers in agriculture. Consequently, many workers could be taken off agriculture without seriously affecting total output.These surplus workers could be gainfully employed in the manufacturing sector.

Shifting workers out of agricultural is not without risks. Questionable output increases if the marginal productivity of agricultural workers is low because of lack of skills. Demand on social services may increase from a shift from rural to urban areas.

Development

possibilities in the agricultural sector may be overlooked. (Most of the Worlds agricultural production and exports come from industrial economies) may be a viable means promoting growth than industry - witness Australia, New Zealand, & Denmark which maintain high incomes along with substantial agricultural specialization. protection/incentive is given to manufacturing companies, care must be taken to minimize the attendant price and tax increases.

Agriculture

If

Promoting Direct Investment Inflows: If

import restrictions keep out foreign-made goods, foreign companies may shift production to avoid loss of domestic market. of foreign companies may hasten a countrys move from agriculture to industry and contribute to growth. Example, Mexicos automobile import restrictions influenced foreign automakers to invest in the country!

Influx

For

Diversification: Export

prices of most primary products are set at the world market. These prices fluctuate widely due to weather conditions and business cycles abroad. This is particularly hard on single product economies. Nigeria

is heavily dependent on oil. Cote d Ivoire depends on cocoa and coffee Diversification of economic activities should promote income and price stability.

Terms of TradeThe terms of trade is a measure of the quantity of imports that a given quantity of a country export can buy or :TOT = PX / PMwhere PX = price of exports, PM = price of imports

In general, the prices of raw materials and agricultural commodities have not risen as fast as the prices of finished products. In addition, the demand for primary products has not grown as fast as those of manufactured products (synthetic alternatives!)

Furthermore, cost savings from the production of agricultural products tend to be passed on to consumers because of competition, while cost savings for manufactured products tend to go to higher wages and profits. terms of trade (TOT) for developing countries deteriorate, the standard of living will fall.

If

Import Substitution Versus Export Promotion In

Import Substitution, a country restricts imports and produces for local consumption goods it formerly imported.

In

Export Promotion, a country focuses on achieving rapid economic growth and favorable BOP by promoting export industries in an approach known as export-led development. For example processing of raw materials before exporting them. The two models may be compatible. Industrialization may result in import substitution and export promotion at the same time!

Balance of Payment Adjustments Governments

may exercise direct influence on trade by choosing the types products or services to restrict for the purpose of improving BOP positions e.g. medical supplies vs. importation of luxuries. (essentials vs. nonessentials)

Note

that other means of BOP adjustment other than direct influence on trade e.g. currency devaluation or deflation in the economy.

Price Control Objectives Some

countries hold monopoly or near monopoly control over certain resources. maintain control and the ability to charge high prices, they enforce strict export regulations. Examples: South Africa ------ diamonds Columbia --------- emeralds

To

Export restrictions may: Keep Make Lead Keep

up world prices in a monopoly situation it extremely costly to prevent smuggling

to the development of substitutes

domestic prices down by increasing domestic supply. producers less incentive to increase output

Give

Shift foreign production and sales e.g. Brazil lost its world monopoly in natural rubber when the product was introduced into Malaysia. The High Price of Chilean natural nitrate led to the development of a synthetic substitute. The under-pricing of exports is often referred to as DUMPING. Many countries, including the US, have anti-dumping legislation. It is sometime controversial to determine the threshold of the difference between export price and domestic price to constitute dumping. Question: Is it desirable for home - country consumers or tax payers to subsidize foreign sales?

Import restrictions may: Prevent dumping from being used to put domestic producers out of business Get other countries to bargain away restrictions Get foreign producers to lower their prices in their domestic markets. The

US passed the SUPER 301 clause in its 1988 Trade Act. This clause permits a threat of trade retaliation to be used to get other countries to reduce import barriers for US exports -- Beef, Rice, ...

Optimum Tariff Theory (OTT) The

OTT holds that a foreign producer will lower its prices if a tax is placed on its products, thus shifting benefits to the importing country. long as the foreign producer lowers its price, some shift in revenue goes to the importing country and the trade tariff is considered an optimum one.

As

Political ObjectivesPolitical imperatives often dictate government restrictions on trade: Maintenance

of Essential Industries (e.g. defense) Dealing With Unfriendly Countries Maintaining Spheres of Influence Preserving National Identity (e.g. the French Movie Industry)

Forms of Trade Control Tariff

barriers affect prices. barriers affect price or quantity.

Non-tariff

Tariffs: A tariff or duty is a governmental tax levied on a good shipped internationally. Tariff is the most common type of trade control. export tariff on goods leaving a country import tariff on good entering a country transit tariff on goods passing through a country

Tariffs When

are imposed for protection or revenue.

assessed on a per unit basis, it is known as specific duty.

When

assessed as a percentage of value of an item it is an ad-valorem duty. combination of specific and ad-valorem is known as a compound duty.

The

A

major tariff controversy concerns the treatment of manufactured exports from the developing countries who seek to move away from purely primary products.

Raw

materials usually enter industrial markets free of if processed (or semi-processed) tariffs are

duty. However,

assigned. If

tariff is based on total value of product, the effective tariff is argued to be disproportionately higher on the manufactured portion.

Pressures by LDCs and the United Nations Conference on Trade and Development (UNCTAD) led to the establishment of the Generalized System of Preferences (GSP), a system of reduced tariff rates offered on goods exported from developing countries.

Another controversy concerns who bears the burden of paying tariff costs? For example in the US: Mink

furs are duty free while polyester sweater carries a high tariff. is duty free while infant food preparations carry a high tariff.juice carries a high tariff but Perrier bottled water is hardly assessed a tariff.

Lobster

Orange

Non- tariff Barriers Subsidies: Countries

most commonly provide assistance to make it cheaper or more profitable for their companies to sell overseas- e.g. providing information, sponsoring trade expositions, establishing foreign contacts and other service subsidies.

Question: Why are service subsidies frequently more justifiable than tariffs? (overcoming versus creating market imperfections!)

There is little agreement on what constitutes a subsidy, for example: Did

Canada subsidize export of fish when it gave grants to fishermen to buy trawlers? the UK subsidize steel when the state owned steel company sustained persistent losses? the US block auto imports when states and communities made concessions for foreign automakers to produce in the US?

Did

Did

The

US subsidizes Boeing and McDonnell Douglas indirectly through payments for development of military aircrafts that have commercial applications.

The

EU subsidizes Airbus Industry directly.

Other

forms of governmental export assistance include foreign aid and loans that are frequently tied to the purchase of domestic products

Custom ValuationBecause it is difficult for the customs to determine if invoice prices are honest: They

may arbitrarily increase the value of a product for ad-valorem duty purposes as a means of preventing/limiting importation countries have now agreed on a procedure for assessing values

Most

Example: The US Custom had to determine whether sport utility vehicles such as Suzuki Samurai and the Land Rover are cars or trucks. There is a 25% duty on trucks and a 2.5% duty on cars! The custom duty classified them as trucks but the courts later ruled them cars!

Quantity Controls:Quotas: The most common type of import or export restriction based on quantity is the quota. A quota may: Set the total amount to be traded allocate amounts by country A specific type of quota that prohibits all trade is known as an embargo.

Buy Local LegislationMost governments give preferences to domestic producers in government procurements through content restrictions or through price mechanism. Through buy local laws -- government purchases give preference to domestic products.

Standards: Countries commonly have a set ofclassifications, labeling, and testing standards designed to protect the safety and health of the domestic population e.g. The EU disallows hormone fattened beef from the US.Specific Permission Requirements: e.g. licensing arrangements, foreign exchange control etc. Administrative Delays: Intentional administrative delays on entry create uncertainty and raise the cost of carrying inventory. Inspection delays or clearing delays.

Reciprocal Requirements: Generally because of shortage of foreign exchange to pay for imports, exporters are frequently required to accept merchandise in lieu of hard currencies. These barter transactions are referred to as counter-trade, offsets, buyback, or compensation arrangements. e.g. Pepsi-Cola for Vodka, Lamp for oil, buses for coffee, railroad engineering services for coal. Restrictions on Services: Countries engage in widespread discrimination that favors their own companies in domestic air transportation, carrying cargo by ships between domestic ports, insurance and banking services, etc. (exhibit in text) .. Discussion: Selected US Barriers.

The Role of GATT (WTO)

GATT is the Worlds major trade-liberalization organization. It was started in 1947 with 23 members. Now there are about 140 members. The organization: Sets rules for negotiations Monitors enforcement Most-Favored-Nation Clause (MFN) The clause requires that if a country grants a tariff reduction to one country, it must grant the same to all other countries.

The MFN clause also applies to quotas and licenses.

GATT Sponsored Rounds

GATTs most important activity has been the sponsoring of rounds or sessions named after the location of the rounds. The most recent sessions are the: Tokyo Round: signed in 1979 Uruguay Round: signed in 1993 Doha Round of Talks: Started in 2001 and currently ongoing.

The

eight GATT rounds since 1947 have reduced tariffs significantly. major change resulting from the Uruguay round is the agreement to replace the GATT secretariat with the Multilateral Trading Organization Called the World Trade Organization (WTO) which will have more authority to oversee trade and be able to assess penalties:

A

A

case study: Foreign Competition and US Automakers:facing foreign imports competitive companies can Try to get Protection Make domestic output competitive Move abroad Seek other market niches are substantial costs as well as considerable uncertainty as to outcome associated with each option. Discuss!!!

When

There

9-1. The Most-favored-nation (MFN) clause of GATT refers toa. GATT-member countries that maintain favorable conditions for trade. b. Countries favored in trade concessions. c. The granting of no special trade concessions to any nation. d. Bilateral trade concessions applied to members of' the same trading bloc. e. A requirement that a trade concession that is granted to one country must be granted to all other countries.

9-2. The infant-industry argument holds that

a. Industries producing infant products should get government subsidies and protection. b. Industries particularly important for the national economy should be subsidized. c. Government subsidies should be granted to growth industries rather than mature ones. d. A young/new industry needs government protection from imports until it becomes competitive enough in world markets.

9-3. Terms of trade refers to:a. The quantity of imports that a given quantity of a country's exports can buy. b. Specific requirements placed on imports at the port of entry. c. Terms agreed upon by two countries to regulate bilateral trade between them. d. The ratio of export prices to import prices. e. Both a and d.

9-4. Import substitution is :

a. An industrialization program emphasizing industries that will have export capabilities. b. An industrialization policy promoting products that would otherwise be imported. c. The quantity of imports that a given quantity of a country's exports can buy. d. The protection of strategic industries.

9-5. Export-led development refers to:a. A country's efforts to promote its exports in order to cut its trade deficits. b. An industrialization policy promoting products that would otherwise be imported. c. An industrialization program emphasizing industries that will have export capabilities. d. The use of revenue from export tariffs to provide infrastructure development

9-6. Dumping is:

a. b. c. d.

Te under-pricing of exports. The overpricing of imports. The subsidizing of imports. The limiting of imports.

9-7. An optimum tariff is:

a. A tax assessed on goods shipped internationally on a per-unit basis. b. A tax assessed on goods shipped internationally as a percentage of the goods' value. c. A percentage tax on the total value of goods shipped internationally, which is argued to impose an even higher percentage on the goods manufactured portion of value. d. The lowering of a foreign producer's price as a result of an imposed import tax.

9-8. The essential-industry argument holds that:a. A country should protect those industries that are essential for its long-term development b. Governments should single out important industries for governmental subsidies. c. Industries with potential export capabilities should be protected. d. Certain industries should be protected for national security reasons.

9-9. A compound duty is:

a. The increase of a foreign producer's price as a result of an imposed import tax. b. A tax on the total value of goods shipped internationally. c. A tax per unit, plus a tax on the value of goods shipped internationally. d. A governmental tax on goods shipped internationally, based either on value or per unit.

9-10. At the conclusion of the Uruguay Round thesecretariat was replaced with the World Trade Organization (WTO). This is important because:a. Regional trading blocs such as NAFTA, EU, and ASEAN are more likely to cooperate with the WTO than with a GATT secretariat. b. European Union members, particularly France, threatened to boycott future GATT rounds because of WTO passage. c. GATT was no longer viable since its functions are now carried out by such regional trading blocs as NAFTA, EU, and ASEAN. d. The WTO will have more authority to enforce trade agreements signed under GATTs auspices.