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IB Note Chapter 3

Short Note
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7 views3 pages

IB Note Chapter 3

Short Note
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INTERNATIONAL

BUSINESS
NOTE
CHAPTER THREE
INTERNATIONAL TRADE POLICIES AND
INSTITUTIONS
Instruments of Trade Policy
 Free trade is a trade without government intervention or interference.
 The government does not attempt to restrict what its citizens can buy from
another country or what they can sell to another country.
 There are several trade policy:
1. Tariffs
 Tariff is a tax levied on imports.
A. Specific Tariffs
 Levied a fixed charge for each unit of imported product.
 Based on physical unit of the product like weight and volume.
B. Ad Valorem Tariffs
 Levied a charge in proportion of the value of imported product.
 Based on the value of the product.
 The charge fluctuate based on the value of imported product.

Why does government impose tariffs?


 To increase government revenue
 To protect domestic producers

2. Subsidies
 Subsidy is a government to domestic producers.
 Subsidies help domestic producers:
 To gain export market
 To compete with low cost imported products
3. Import Quota
 Import quota is restriction of the quantity of imported product.

The Cases for Government Intervention


1. Political Arguments
 The government intervene to protect the interest of certain groups (normally producers) at
the expense of other groups (normally consumers).
2. Economic Arguments
 The government intervene to boost the overall economic (wealth) of the nation.
 To the benefit of all (both the producer and the consumer).

The Development of World Trade Organization


 After the WWII U.S. and other nations understand the value of free trade and established
General Agreement on Tariffs and Trade (GATT) in 1947 to govern the world trade.
 After fifty years, in 1995, the General Agreement on Tariffs and Trade (GATT) changed
its name to the World Trade Organization (WTO).
 World Trade Organization is currently focusing on:
1. Anti-dumping policies
2. Protectionism in agriculture
3. Protecting intellectual property
4. Market access for non agricultural products

What is dumping?
 Dumping is selling goods in a foreign market below their cost of production.
 Dumping is selling goods in a foreign market below their fair market value.

Why companies use dumping method?


 To unload excess production in foreign markets.
 Drive indigenous competitors out of that market, and later raising prices and earning high
profits.
 Anti-dumping policy is important to protect indigenous or domestic companies from
unfair competition.

Trade Barriers
 Trade barriers are any government policy or regulation that restricts or limits international
trade.
 The purpose of trade barriers can vary, from protecting domestic industries to addressing
national security concerns.
 Trade barriers include:
 Tariffs
 Quotas
 Subsidies

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