The Global Trade and Investment Environment Learning Objectives

LO 7-1 Identify the policy instruments used by governments to

influence international trade flows.
LO 7-2 Understand why governments sometimes intervene in
international trade.
LO 7-3 Summarize and explain the arguments against strategic
trade policy.

Source: © Si wei/AP Images

LO 7-4 Describe the development of the world trading system
and the current trade issue.
LO 7-5 Explain the implications for managers of developments in
Chapter 7: Government Policy and International Trade the world trading system.

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Opening Case: Introduction

Is China Dumping Its Excess Steel Production?
Free trade refers to a situation where a government
 Produced half the world’s output of steel by 2015 does not attempt to restrict what its citizens can buy
 Bottom fell out of Chinese domestic market for steel from another country or what they can sell to another
country
 Need to export unwanted product – even at a loss
 While many nations are nominally committed to free
 Low-priced exports impacting global steelmakers trade, they tend to intervene in international trade to
negatively protect the interests of politically important groups

 U.S. producers claim China is dumping product

 U.S. Commerce Department implemented duties
 European Union considering similar measures

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Instruments of Trade Policy 1 of 10 Instruments of Trade Policy 1 of 9

Seven main instruments of trade policy Nontariff barriers include
1. Tariffs 1. Subsidies
2. Subsidies 2. Quotas
3. Import quotas 3. Voluntary export restraints
4. Voluntary export restraints 4. Antidumping duties
5. Local content requirements
6. Administrative policies
7. Antidumping duties

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Basic Marketing – Chapter 6

Handout 6-1
 Instruments of Trade Policy 2 of 9 Instruments of Trade Policy 3 of 9
Tariffs Tariffs continued
 A tariff is a tax levied on imports that effectively raises • Increase government revenues
the cost of imported products relative to domestic • Provide protection to domestic producers against
products foreign competitors by increasing the cost of imported
 Specific tariffs: levied as a fixed charge for each unit of a good foreign goods
imported • Force consumers to pay more for certain imports
 Ad valorem tariffs: levied as a proportion of the value of the • Tariffs are generally pro-producer and anticonsumer
imported good
• Import tariffs reduce the overall efficiency of the world
economy

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Did You Know? Instruments of Trade Policy 4 of 9

Subsidies
Did you know that the
 Subsidy: a government payment to a domestic producer
high price of SUVs in
the US is the result of  Subsidies help domestic producers
the "chicken tariff"?  Compete against low-cost foreign imports
 Gain export markets

 Consumers typically absorb the costs of subsidies

Click to play video

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Instruments of Trade Policy 5 of 9 Figure 7.1 Hypothetical Tariff Rate Quota

Import Quotas and Voluntary Export Restraints
Import quota
 A direct restriction on the quantity of some good that may be
imported into a country
Tariff rate quota
 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
Voluntary export restraint (VER)
 Quota on trade imposed by the exporting country, typically at the
request of the importing country’s government
Quota rent
 The extra profit that producers make when supply is artificially
limited by an import quota

Jump to Appendix 1 long image

description
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Basic Marketing – Chapter 6

Handout 6-2
 Instruments of Trade Policy 6 of 9 Instruments of Trade Policy 7 of 9
Export Tariffs and Bans Local Content Requirements (LCR)
 Export tariff is a tax placed on the export of a good  A local content requirement demands that some specific
 Goal is to discriminate against exporting fraction of a good be produced domestically
 Can be in physical terms or in value terms
 Export ban is a policy that partially or entirely restricts
the export of a good  Local content requirements benefit domestic producers
 Ban of exports of U.S. crude oil in 1975 to ensure sufficient and jobs, but consumers face higher prices
supply of domestic oil at home

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Is Having a Local Content Requirement a Good Idea? Instruments of Trade Policy 8 of 9

Local content requirements refer to a specific fraction of a product that needs Administrative Policies
to be manufactured domestically. Basically, LCRs establish a minimum level of
local content required under trade law when giving foreign companies the  Administrative trade polices: bureaucratic rules that are
right to manufacture in a particular place. In the wake of the economic designed to make it difficult for imports to enter a country
downturn in 2008, many economists feared that some governments would
institute protectionist policies similar to the tariff escalations during the Great  These polices hurt consumers by denying access to
Depression of the 1930s. However, most public policy officials avoided possibly superior foreign products
traditional forms of protection (e.g., tariffs, quotas). This led some observers
to underestimate the degree of protectionism. Instead, what had happened
was that so-called nontariff barriers in the form of local content requirements
had become increasingly popular. As a (1) citizen of a specific country and (2)
as a global customer, do you think local content requirements help you as a
citizen of a country, as a global customer, as both, or as neither?
Source: G. C. Hufbauer and J. J. Scott, “Local Content Requirements: A Global Problem Washington, D.C.,”
Peterson Institute for Global Economics, 2013.

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Instruments of Trade Policy 9 of 9 The Case for Government Intervention 1 of 4

Antidumping Policies Political arguments
 Dumping: selling goods in a foreign market below their  Concerned with protecting the interests of certain
cost of production, or selling goods in a foreign market at groups within a nation (normally producers), often at
below their “fair” market value the expense of other groups (normally consumers)
 Objective is to protect domestic producers from unfair foreign Economic arguments
competition
 Concerned with boosting the overall wealth of a nation
 May be predatory behavior, with producers using substantial (to the benefit of all, both producers and consumers)
profits from their home markets to subsidize prices in a foreign
market with a goal of driving indigenous competitors out, and later
raising prices and earning substantial profits
 U.S. firms that believe a foreign firm is dumping can file a
complaint with the government
 If the complaint has merit, antidumping duties, also known as
countervailing duties may be imposed

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Basic Marketing – Chapter 6

Handout 6-3
 The Case for Government Intervention 2 of 4 The Case for Government Intervention 3 of 4
Political Arguments for Intervention Economic Arguments for Intervention
 Protecting jobs and industries  The infant industry argument
 Protecting national security  An industry should be protected until it can develop and be
 Retaliating viable and competitive internationally
 Use intervention as a bargaining tool and force trading partners
 This argument has been criticized because
to “play by the rules of the game”
 It is useless unless it makes the industry more efficient
 Protecting consumers
 Ban unsafe products  If a country has the potential to develop a viable
competitive position, its firms should be capable of raising
 Furthering foreign policy objectives
necessary funds
 Grant preferential trade terms to a country it wants to build
relations with
 Pressure or punish “rogue” states
 Protecting human rights

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The Case for Government Intervention 4 of 4 Trading with Cuba

Economic Arguments for Intervention continued
 Strategic trade policy Even though the
 By appropriate actions, government can help raise national
United States holds
income if it can ensure first-mover advantages in an industry trade sanctions
are domestic with Cuba, other
 Might be beneficial for a government to intervene in an Western countries
industry by helping domestic firms overcome barriers to entry continue to trade
created by foreign firms with first-mover advantages with the island
nation.

Source: © Adalberto Roque/AFP/Getty Images

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The Revised Case for Free Trade 1 of 3 The Revised Case for Free Trade 2 of 3
 New trade theorists believe government intervention Retaliation and Trade War
in international trade is justified  Krugman: strategic trade policies to establish domestic
 Classical trade theorists disagree firms in a dominant position in a global industry are
 Some new trade theorists believe that while strategic beggar-thy-neighbor policies that boost national income at
the expense of other countries
trade theory is appealing in theory, it may not be  A country that attempts to use such policies will probably provoke
workable in practice – they suggest a revised case for retaliation
free trade  A trade war could leave both countries worse off
 Don’t engage in retaliation but help establish rules to minimize the
use of trade-distorting subsidies

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Basic Marketing – Chapter 6

Handout 6-4
 The Revised Case for Free Trade 3 of 3 Development of The World Trading System 1 of 8
Domestic Policies Since World War II, an international trading framework
 Governments can be influenced by special interest groups has evolved to govern world trade
 A government’s decision to intervene in a market may appease a  In its first fifty years, the framework was known as the
certain group, but not necessarily support the interests of the General Agreement on Tariffs and Trade (GATT)
country as a whole
 Since 1995, the framework has been known as the World
 Krugman sees this as a further reason for not embracing strategic
Trade Organization (WTO)
trade policy

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Do You Believe in Free Trade Agreements? Development of The World Trading System 2 of 8
The benefits of free trade agreements are often hard to see. At From Smith to the Great Depression
the same time, the benefits of protecting certain industries and/
or companies from foreign competition are often very visible.  Up until the Great Depression of the 1930s, most countries
Given these scenarios, many people often argue that free trade had some degree of protectionism
agreements are bad for their country. Perhaps as a result, many  The U.S. enacted the Smoot-Hawley Act (1930): created
governments impose many tariffs, quotas, and other nontariff significant import tariffs on foreign goods
barriers to trade. For example, the common perception is that
 Other nations took similar steps and as the depression
by establishing trade barriers, a country keeps the jobs at home
deepened, world trade fell further
instead of jobs being shipped overseas. But is this really true?
Source: D. J. Boudreaux, The Benefits of Free Trade: Addressing the Myths (Washington, DC: Mercatus Center,
George Mason University, 2013).

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Development of The World Trading System 3 of 8 Development of The World Trading System 4 of 8
1947-1979: GATT, Trade Liberalization, and Economic 1980-1993: Protectionist Trends
Growth  Japan’s economic success strained what had been more
 The General Agreement on Tariffs and Trade (GATT) was equal trading patterns
established in 1947  Persistent trade deficits by the U.S caused significant
 Multilateral agreement to liberalize trade and gradually problems in some industries and political problems for
eliminate barriers to trade the government
 Tariff reduction was spread over eight rounds  Many countries found that although GATT limited the
 Very successful in early rounds use of tariffs, there were many other forms of
intervention that had the same effect that did not
technically violate GATT

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Basic Marketing – Chapter 6

Handout 6-5
 Development of The World Trading System 5 of 8 Development of The World Trading System 6 of 8
The Uruguay Round and the World Trade Organization WTO: Experience to Date
 Uruguay Round emphasized services, intellectual  Members account for 98% of world trade
property, and agricultural subsidies
 Trade issues related to services and intellectual property and  It was hoped that it would emerge as an effective
agriculture were emphasized advocate and facilitator of future trade deals
 Dragged on for seven years  So far, most countries have adopted WTO
 The World Trade Organization recommendations for trade disputes
 The WTO encompassed GATT, the General Agreement on Trade
in Services (GATS), and the Agreement on Trade Related Aspects  In general, countries involved in disputes accept WTO
of Intellectual Property Rights (TRIPS) recommendations
 Procedures subject to strict time limits
 Global telecommunication and financial service
industries targeted for reform

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Development of The World Trading System 7 of 8 Protecting Agriculture

The Future of the WTO: Unresolved issues and the
Doha Round
 Anti-dumping actions
 Encourage members to strengthen the regulations Removing barriers
governing the imposition of antidumping duties to trade and
 Protectionism in agriculture subsidies in
 Concerned with the high level of tariffs and subsidies agricultural
in the agricultural sector of many economies products should
 Protecting intellectual property benefit consumers.
 Members believe that the protection of intellectual Source: © Mark Elias/Bloomberg/Getty Images

property rights is essential to the international trading

system

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Development of The World Trading System 8 of 8 Development of The World Trading System 8 of 8
The Future of the WTO: Unresolved issues and the The Future of the WTO: Unresolved issues and the
Doha Round continued Doha Round continued
 Market access for nonagricultural goods and services  Multilateral and Bilateral Trade Agreements
 Tariffs on services remain higher than on industrial goods  Designed to capture gain from trade beyond those agreements
 A new round of talks Doha currently attainable under WTO treaties
 Have been ongoing since 2001 concerned with cutting tariffs on  Tariff barriers raise the costs of exporting products to a country
industrial goods and services, phasing out subsidies to  Quotas may limit a firm’s ability to serve a country from locations
agricultural producers, reducing barriers to cross-border outside that country
investment, limiting the use of antidumping laws  A firm may have to locate more production activities in a given
market than it would otherwise.
 The threat of antidumping action limits the ability of a firm to
use aggressive pricing to gain market share in a country
 Policy Implications

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Basic Marketing – Chapter 6

Handout 6-6
 Focus on Managerial Implications 1 of 2 Focus on Managerial Implications 2 of 2
TRADE BARRIERS, FIRM STRATEGY, AND POLICY Policy Implications
IMPLICATIONS  International firms have an incentive to lobby for free
• Trade barriers impact firm strategy trade, and keep protectionist pressures from causing them
• Tariff barriers raise the costs of exporting to have to change strategies
• Quotas may limit a firm’s ability to serve a country  Three drawbacks to government intervention
• Firms may need to conform to local content requirements  Self-defeating as it protects the inefficient
• Future trade barriers can influence firm strategy  Dangerous as it might invite retaliation
• Firms can play a role in promoting free trade or trade  Unlikely to be well-executed as can be captured by special interest
groups
barriers

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Summary Appendix 1 Figure 7.1 Hypothetical Tariff Rate Quota

In this chapter we have An ad valorem tariff rate of 10 percent might be levied on 1
million tons of rice imports into South Korea, after which an out-
 Identified the policy instruments used by governments to of-quota rate of 80 percent might be applied. Thus, South Korea
influence international trade flows. might import 2 million tons of rice, 1 million at a 10 percent tariff
 Understood why governments sometimes intervene in rate and another 1 million at an 80 percent tariff
international trade.
 Summarized and explained the arguments against strategic
trade policy.
 Described the development of the world trading system
and the current trade issues.
 Explained the implications for managers of developments
in the world trading system.
Return to slide

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Basic Marketing – Chapter 6

Handout 6-7