The Political Economy of International Trade

Outline of Chapter :☆ Instruments of Trade Policy

Tariffs Subsidies Import Quotas &Voluntary Export Restraints Local Content Requirement Administrative Policies Antidumping Policies

Tariffs

Subsidies QuotasVoluntary

ExportRestraints

LocalContentRequire-

ments

Admini-strativePolicies

Anti-dumpingPolicies

1. tariffs : tax on imports

1) two categories

＊ Specific tariffs:

fixed charge for each unit

3$ per barrel of oil

＊ Ad valorem tariffs:

tax for the valueEU on bananas from Latin America – tariff 15 to 20%

by the value on the first 2.5 million tons of import

2) Who gains: --- government raising revenue for government --- domestic producers protecting against foreign competitors3) Who suffers: consumers paying more for certain imports

4) Effect of import tariffs: --- pro-producers and anti-consumers why anti-consumers: restriction of supply, so domestic price high

----- reducing the efficiency of the world economy why protecting domestic firms: because they can’t compete with foreign products successfully.

foreign products: more efficient inefficient use of resources

Winners: - Government (revenues) - Local industries/producers - Employees of protected industries keep their jobs

Losers: - Local consumers (price high and quality low) - Employees of protected industries do not develop new skills

Key definition A tariff is a tax levied on imports.

Specific tariffs are levied as a fixed charge for each unit of a good imported. Ad valorem tariffs are levied as a proportion of the value of the imported good.

2. subsidies :

1) definition:

a government payment to a domestic

producer

2) the field subsidized:

＊ agriculture : largest beneficiary of

subsidies

e.g.: the European Union, the U.S., Japan

＊ manufacturing: much lower but significant

3) the objective of subsidy:

helping domestic firm

--- to be a first-mover

--- to be a major global

company

--- to gain

4) negative effect:

--- many not successful

--- protecting inefficiency

--- limiting trade

--- decreasing wealth

Winners: - Local producers and workforce

Losers: - Direct cost to tax payers

- Foreign competitors

Key definition

A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.

3. import quotas and Voluntary export restraints (VER)

1) definition:

import quotas: restriction on quantity

of imports

2) Tariff rate quota

tariff rate:

lower for imports within the quota,

higher for imports over the quota

goal: limiting imports over quotaUS has quota on cheese imports. The only firms allowed to

import cheese are certain trading cos. Each of which is allocated the right to import a maximum number of pounds of cheese each year.

3) voluntary export restraints (VER):

quota by exporting country Why exporting countries restraint their own

export: --- fearing heaving tariffs or quotas --- making the best of a bad situation

4) negative effect

--- benefiting domestic producers

(less efficient)

--- high price for consumers

5) e.g. automobile

sugar

Winners: - Local producers and workforce

Losers: - Consumers - Foreign competitors (exporting

countries)

Key definition

An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms.

Key definition

A voluntary export restraint is a quota on trade imposed by the exporting country, typically at the request of the importing country’s government.

E.g. Limitation on auto exports to the US enforced by Japanies automobiles in 1981.

4. local content requirement 1) definition: specific fraction produced domestically ---- by physical term ---- in value term 75% of components for the product must be produced

locally 75% of the value for the product must be produced locally

2) the function ---- developing countries: shifting from simple assembly to manufacture ---- developed countries: protecting local jobs and from competition eg: US government preference, 51%

3) effect: --- benefit domestic producers --- high price for consumers

Winners: - Local support industries acting as suppliers of local manufacturers - Local workforce

Losers: - Local consumers (prevented from buying foreign-made

goods)

Key definition

A local content requirement is a requirement that some specific fraction of a good be produced domestically.

5. Administrative policies 1) definition: ---- rules: making it difficult for imports ---- informal policies eg: Japan: cutting tulip bulb﹡ ﹡opening express package France: a small customs entry point

2) effect --- benefiting producers --- hurting consumers

Netherland’s Export

Winners: - Local producers and employees

Losers: - Local consumers

Key definition

Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country.

6. Antidumping policies 1) dumping: selling goods in a foreign market : at the price: (1) below cost (2) below fair market value

2) aims of dumping: ---- unloading excess products ---- predatory (take others’ benefits)

behavior: driving competitors out of the market. ---- earning profit

3) antidumping: ---aim: punishing dumping ; protecting domestic producers --- procedure: ﹡domestic producer: filing a petition ﹡ government agencies: (Commerce Department,) investigating the complaint ﹡ If true, imposing countervailing duties Countervailing duties, which represent a special tariff, can

be fairly substantial and stay in place for up five years.

Winners: - Local producers and employees

Losers: - Local consumers

Key definition

In the context of international trade, dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their “fair” market value.

Case study:

Shrimps, Turtles, and the WTO

Chicken Turtle Deirochelys reticularia

This turtle gets its name from its extremely long neck that looks to some like a chicken's neck. Remember this fact if you ever see one on land and try to pick it up; this species can reach a long way under, over, or around its shell to bite.

False Map Turtle Graptemys pseudogeographica

This turtle was once common, but its numbers have been reduced by water pollution and the pet trade (although it does not fare well in captivity). Many individuals will sometimes pile up on a favored basking site. It feeds on aquatic plants, insects, crustaceans, and mollusks. The best way to get a good look at shy turtles like this is to watch them through binoculars from a distance.

1. introduction: 1) event: see turtles: endangered 2) reason: poor fishing practice: shrimp boats trapping turtles 3) US reaction: law ---equipment: turtle-excluder --- banning importing shrimps if no such equipment

2. case: 1) when: in 1996 2) who: between US and India, Pakistan, Malaysia, and Thailand 3) event: lawsuit: ---- filed by four countries to the WTO against US government ---- arbitration panel: reviewing US position according to the WTO rules

4) US claim: ---- protecting exhaustible resources, restrictions : right ---- supported by the World Wildlife Fund 5) 4 countries claim: US ban ---- illegal under WTO: apply domestic legislation outside of its country. ---- hypocrisy (not truly kind)

6) WTO decision: US in violation of WTO rules: against

targeted countries, only to three countries not to all 7) US revision in law: applying its to all countries which is consistent with WTO rules 8) result: American import ban stays on.

3. implications from the case: 1) No discrimination is allowed in international trade according to the WTO 2) Restrictions are allowed if with reasonable causes.

III. Development of the World Trading System

GATTGATTGATTGATT since 1947since 1947

General Agreement on Tariffs and Trade

WTOWTOWTOWTO since 1995since 1995

World Trade Organisation

Global Trade SystemGlobal Trade System