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
