07/05/2014 1 Topic 3 Political Economy of International Trade INTERNATIONAL BUSINESS ENVIRONMENT FOOD FOR THOUGHT 07/05/2014 International Business Environment – JG DITTER 2 "Perhaps, no area of economics displays such a gap between what policy makers practice and what economists preach as does international trade. The superiority of free trade is one of the most cherished beliefs, yet international trade is rarely free". Dani RODRIK, Political Economy of Trade Policy (1955)
Transcript
07/05/2014
1
Topic 3
Political
Economy of
International
Trade
INTERNATIONAL BUSINESS ENVIRONMENT
FOOD FOR THOUGHT
07/05/2014 International Business Environment – JG DITTER 2
"Perhaps, no area of economics displays such a gap between what policy makers practice and what economists preach as
does international trade.
The superiority of free trade is one of the most cherished beliefs, yet international trade is rarely free".
Dani RODRIK, Political Economy of Trade Policy (1955)
07/05/2014
2
Mercantilism promotes government involvement in supporting exports and limiting imports
According to the theory of comparative advantage, free trade is always a win-win
situation.
The new trade theory supports international trade but considers that trade policies are
sometimes necessary to let strategic industries develop
FROM THEORY …
07/05/2014 International Business Environment – JG DITTER 3
Radical criticism / nationalism
International business is blamed as an instrument of economic/political domination
Laissez-faire
Comparative advantage shapes the distribution of international production
Pragmatic nationalism
International business is favoured if benefits prevail over costs
… TO PRACTISE
07/05/2014 International Business Environment – JG DITTER 4
07/05/2014
3
07/05/2014 International Business Environment – JG DITTER 5
GOVERNMENT POLICIES AND TRADE
GOVERNMENTS' INFLUENCE ON INTERNATIONAL TRADE
Microeconomic policiesIndustrial policy – Education and
infrastructure – Public procurement –Market regulation
Macroenomic policiesFiscal – Monetary policies
FOREIGN EXCHANGE POLICY
TRADE POLICY
Section 1TRADE POLICY INSTRUMENTS
6
07/05/2014
4
TRADE POLICY INSTRUMENTS
07/05/2014 International Business Environment – JG DITTER 7
Import restrictions Export restrictions
Import promotion Export promotion
Foreign direct investment
Restriction / Promotion
IMPORT RESTRICTION MEASURES
07/05/2014 International Business Environment – JG DITTER 8
QUANTITATIVE BARRIERS
Tariffs(incl. anti-dumping or countervailing duties)
07/05/2014 International Business Environment – JG DITTER 11
FOOD FOR THOUGHT …
Why do intergovernmental organisations like the WTO consider that custom duties are preferable to quotas and other non-tariff barriers
Tariffs ...
... Are transparent
... Create less distortion than quotas
... Are easier to lift than non-tariff obstacles such as norms or
standards
… Generate revenue for the government
THE EFFECTS OF TARIFFS (SMALL COUNTRY)
07/05/2014 International Business Environment – JG DITTER 12
D
S
d1
d2
q1q2
P1Worldprice
P2WorldPrice+ tariff
P*Domesticprice
P
Q
E*
q*
s1
s2
c2c1
Government revenues
Imports
07/05/2014
7
THE EFFECTS OF QUOTAS
07/05/2014 International Business Environment – JG DITTER 13
D
SD
q'
PwWorldprice
P*Domesticprice
P
Q
E*
c'
PqDom.
Price w.
quota
S'D
Import quota q1c1
A TARIFF PARADOX?
07/05/2014 International Business Environment – JG DITTER 14
Average Tariff Rates on Manufactured Products as % of Value
07/05/2014
8
Export duties / Taxes and other charges / Quotas and bans /Minimum prices / Non-automatic licensing
Often imposed on raw materials
Fiscal revenue (development and social policies)Environmental protection (reduce negative externalities pollution)
Conservation of natural resources (for future generations)
The actual aim is generally to improve the competitive position of domestic industries by increasing the price of their foreign
competitors' inputs
07/05/2014 International Business Environment – JG DITTER 15
EXPORT RESTRICTION MEASURES
07/05/2014 International Business Environment – JG DITTER 16
THE "RARE EARTHS" CASE
The Chinese government has collected export taxes of 15 to 25% on rare earths for years and has further restricted exports in the past two years with
reductions in export quotas. When China joined the World Trade Organization in 2001, it agreed to refrain from imposing export taxes and quotas. The Chinese government completely halted exports of raw rare earths to Japan on Sept. 21,
2010 during a dispute over Japan’s detention of a Chinese fishing trawler and its crew, and it expanded that interruption in shipments to all countries, notably
the United States and those in Europe, on Oct. 18.
Chinese officials have denied that they issued any official ban on rare earths exports and contend that export quotas and taxes are needed to conserve
scarce supplies and protect the environment, which WTO rules allow. Western trade lawyers say that China would have a hard time winning the conservation case if another country challenged its policies before a WTO tribunal because China shows little sign of limiting its own soaring consumption of rare earths.
New York Times, November 5, 2010
07/05/2014
9
07/05/2014 International Business Environment – JG DITTER 17
TRADE RESTRICTIONS – BUSINESS ISSUES
Trade restriction measures
Constrain MNCs' strategies
Product positioning(norms and standards)
Pricing strategy(tariffs and antidumping duties,
norms and standards)
Locations, entry modes(quotas, local content requirements)
Export subsidies
Cash, tax breaks, price supports
(e.g. former US foreign sales corporations)
Export financing programmes
Low-interest loans, loan guarantees
(e.g. French COFACE)
Foreign trade zones
Products are subject lower customs duties and/or fewer
customs procedures
(e.g. Mexican maquiladoras)
Government agencies
Trade missions for officials and businesses, export-
promotion offices
(e.g. Japanese JETRO)
Currency manipulation
07/05/2014 International Business Environment – JG DITTER 18
EXPORT PROMOTION MEASURES
07/05/2014
10
07/05/2014 International Business Environment – JG DITTER 21
EXPORT PROMOTION – THE GERMAN CASE
Federal Ministry of Economics and Technology
Supports the creation of global conditions that foster free trade and competition
Seeks to strengthen the competitive position of German companies on world markets
Foreign trade portal (iXPOS)
Provides German companies with information on foreign markets
Provides foreign companies with information about the German market
Germany Trade & Invest GmbH
Promotes Germany as a business and technology location
Supports companies based in Germany with global market information
Euler HERMES Provides export credit and investment guarantees
German chambers of commerce abroad
Support market interests of German companies in the host country.
Provide services to local companies which are involved in bilateral business. Market Germany as a business location in the host country.
07/05/2014 International Business Environment – JG DITTER 26
ASSIGNMENT – ARGENTINA
1. What are the trade restriction measures listed in the text and their expected effects?
2. Tariffs are usually considered as the most adequate trade restriction measure by the World Trade Organisation. Why do Argentine authorities nonetheless avoid using tariffs as a trade policy instrument?
3. Argentina's protectionism is often considered to be part of an "import substitution" development strategy. Please explain and discuss.
4. What are the various limits/shortcomings of Argentina's protectionism, on different levels?
Section 2TRADE POLICY JUSTIFICATIONS
27
07/05/2014
13
THE CASE FOR TRADE POLICY
07/05/2014 International Business Environment – JG DITTER 28
Political issues
Strategic issues
Social issues
NON-ECONOMIC MOTIVES
ECONOMIC MOTIVES
National levelIndustry level
Protecting consumers from "dangerous" products
Protecting jobs (i.e. in declining industries)
Protecting "sensitive" industries (deemed important for national security)
Retaliating to unfair foreign competition (subsidies, dumping)
Furthering the goals of foreign policy (i.e. embargo)
Protecting human rights in exporting countries
Addressing demands from powerful interest groups (public choice)
07/05/2014 International Business Environment – JG DITTER 29
NON-ECONOMIC MOTIVES – DETAILS
07/05/2014
14
07/05/2014 International Business Environment – JG DITTER 30
PUBLIC CHOICE
Public choice theory assumes that politicians want to win elections —otherwise they will not be politicians for long. To achieve their goal, the
politicians propose measures that they think the majority prefers, and they join political parties. “Parties formulate policies in order to win elections,” wrote Anthony Downs in An Economic Theory of Democracy, “rather than
win elections in order to formulate policies.” […]
In order to influence collective choices, citizens have to engage in collective actions: participate in demonstrations, organize lobbying activities,
contribute to political parties, etc. […] Small groups with concentrated interests like farmers or steel producers will be better organized and wage more efficient collective action than large groups with diffuse interests like
taxpayers or steel consumers.
And well-organized groups will exploit less organized ones.
07/05/2014 International Business Environment – JG DITTER 32
In March 2002 the US administration announced a complicated schedule of temporary high tariffs on different kinds of steel. Something like $8 billion of imports from Europe, Japan, South Korea and other countries were affected, about 10% of the world market.
The White House said that these duties of up to 30% on imported steel were designed to give the struggling US steel industry a three-year respite from international
competition so that it could restructure. Yet, political factors certainly came into play in this decision: the US president, George Bush, needed political support from key states such as Pennsylvania, West Virginia and Ohio, all of which produce steel, in advance of
the mid-term elections. But, this decision was criticized by US car makers, who said that it would increase the price of their materials, causing job losses in the industry and
making vehicles more expensive.
The EU, Japan, Brazil, South Korea, Norway, New Zealand and Switzerland responded by lodging a complaint with the World Trade Organisation. The WTO concluded that the
tariffs violated international trade rules allowing countries to protect themselves against sudden surges of imports. In December 2003, the US administration eventually decided
to lift these tariffs
Sources: The Economist, The Guardian, The New York Times
07/05/2014 International Business Environment – JG DITTER 33
EU trade chief Peter Mandelson is pushing for tariffs of up to 66% on energy-efficient light bulbs imported from China to be lifted completely – a move that could see the price paid by
consumers cut by around two thirds. He has the support of a majority of European producers, including the Dutch electronics group Philips, which outsources the manufacturing of its power-
saving bulbs to China.
German industry Commissioner Günter Verheugen is opposed to the move, claiming that it could cause job losses for Germany's national light-bulb manufacturer Osram, as dumped
imports from China flow into the EU. He is expected to call for a compromise in the form of a two-year extension of duties.
Earlier in July, a spokesperson for Mandelson dismissed such claims, saying that it was purely "a question of commercial competition between two European companies" and that "Osram is seeking to continue anti-dumping measures because they hit Philips proportionately harder".
A number of European companies, including Dutch electronics group Philips and Swedish retailer Ikea, who import large quantities of power-saving bulbs from China, have also criticised the
move. The Foreign Trade Association's Legal Advisor Stuart Newman pointed to the "absurdity" of maintaining tariffs at a time when the EU is attempting to increase the use of green
technologies in order to achieve its dual goal of cutting energy use and CO2 emissions by 20% by 2020.
07/05/2014 International Business Environment – JG DITTER 35
THE INFANT INDUSTRY ARGUMENT
Capital intensive industries
Economies of scale
MNCs have a competitive advantage on domestic firms in
the domestic market
Protectionism helps domestic industry to foster comparative
/ competitive advantage
INFANT INDUSTRIES: THE USA IN 1861
07/05/2014 International Business Environment – JG DITTER 36
07/05/2014
17
07/05/2014 International Business Environment – JG DITTER 37
THE CASE OF CHINESE INTERNET
Chinese Internet censorship [can be seen] as a form of [hidden] protectionism. Much like a regime of infant industry protection, when Western web services are blocked, it forces Chinese users to turn to the Chinese competition.
For instance, China’s recent blocking of Feedburner led the Chinese blogosphere to start using the Chinese provider Feedsky. When the blocks are lifted, the Chinese users are unlikely to return to the Western services.
Unless, like Microsoft’s Hotmail, which has been blocked off and on, the service is significantly embedded into another service Chinese users depend on, such as Windows Live Messenger.
http://expat.wordpress.com/tag/censorship/
07/05/2014 International Business Environment – JG DITTER 38
Retribution of investment (current account balance)
Dependency on foreign decision-makers
Loss of sovereignty and autonomy
Competition to local corporations
07/05/2014
19
07/05/2014 International Business Environment – JG DITTER 41
ECONOMIC MOTIVES (2): NATIONAL LEVEL
Economic development strategies
Export promotion vs. import substitution
Government revenues raised from tariffs
"National self-interest"
Prisoner's dilemma
The "large country" argument
An increase in tariffs at home will drive world prices to fall
07/05/2014 International Business Environment – JG DITTER 42
IMPORT SUBSTITUTION STRATEGIES
Development of domestic infant
industriesInward-looking
growth
Support to domesticdemand
Expansion of domestic market
FDI promotion
Import restrictions
07/05/2014
20
07/05/2014 International Business Environment – JG DITTER 43
EXPORT-PROMOTION STRATEGIES
Export-led growth
Support to domestic
investment
Development of export-oriented
industries
Import restrictions
Domestic demand
restraints
07/05/2014 International Business Environment – JG DITTER 47
PROTECTIONISM IN CRISIS TIMES
Current protectionism is the result of exogenous shocks which have affected emerging countries since 2008.
It could, in future, involve possible payment deadlines for importers but also more barriers to entry for foreign businesses wanting to take advantage of the emerging economies’ vigorous domestic
demand.
Argentina, Russia and, to a lesser degree, India, are the countries to watch.
07/05/2014 International Business Environment – JG DITTER 48
Public choice
Trade policies are likely to be captured by private interest groups who will distort it to their own ends
Negative impact on domestic economy
Encourages rent-seeking behaviour leading to higher prices for consumers, less incentive to quality and innovation
Non-cooperative behaviour …
Strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbour
policies that boost national income at the expense of other countries
… leading to retaliation and trade wars
Countries that enforce protectionist measures will probably provoke retaliation. Cross-retaliation may in turns lead to a trade war
PROTECTIONISM HAZARDS (CTD)
07/05/2014 International Business Environment – JG DITTER 49
It is understandable that at a time of suffering, people want protection. But the irony is that trade protectionism does not protect. One country’s exports are another country’s imports, and vice versa.
One country’s protectionism will lead to another country’s protectionism.
This is even more true in today’s world of global value chains where protectionism hurts not only consumers but also upstream domestic
producers importing low valued-added input to focus on higher technology — oriented tasks — hence endangering highly paid,
07/05/2014 International Business Environment – JG DITTER 50
It is well established that by liberalising trade and capitalising on areas of comparative advantage, countries can benefit economically. Use of resources - land, labour,
physical and human capital - should focus on what countries do best.
Consumers ultimately benefit because liberalised trade can help to lower prices and broaden the range of quality goods and services available. Companies can benefit
because liberalised trade diversifies risks and channels resources to where returns are highest. When accompanied by appropriate domestic policies, trade openness also
facilitates competition, investment and increases in productivity.
Trade reforms, even if beneficial for a country overall, may negatively affect some industries or some jobs and many commentators worry about negative effects on the environment. The solution to these problems is not to restrict trade. They should be
tackled directly at source through labour, education and environmental policies.
The OECD aims to create better understanding of how trade openness can best influence economies in member countries as well as in the major emerging and non-
