international business environment - wiwi.uni-siegen.de · 06.07.2012 · import-promotion policies...

07/06/2012

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INTERNATIONAL BUSINESS

ENVIRONMENT

TOPIC 3

Political Economy of International

Trade

(WHAT POLICY-MAKERS DO AND WHY THEY DO IT)

Preliminary statement

07/06/2012 International Business Environment - JG DITTER 3

"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)

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From theory to reality


Most nations are nominally committed to free trade

In practise, governments intervene to protect the interests of specific groups

TRADE POLICY

IMPORT …

RESTRICTIONS Promotion

EXPORT …

Promotion Restrictions

Import restriction measures


Quantitative barriers

Tariffs (incl. anti-dumping or countervailing

duties)

Quotas

Voluntary export restraints

Domestic subsidies

Qualitative barriers

Local content requirements

Norms and standards

(technical barriers to trade)

Administrative

obstacles (e.g. non-automatic

licensing)

Exchange rate manipulation

See: http://www-personal.umich.edu/~alandear/glossary/intro.html

http://www-personal.umich.edu/~alandear/glossary/intro.html





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Food for thought …


Why do intergovernmental organisations like the WTO consider

that custom duties are preferable to quotas and other non-tariff barriers, especially currency manipulation

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)


D

S

d1

d2

q1 q2

P1 World price

P2 World Price + tariff

P* Domestic price

P

Q

E*

q*

s1

s2

c2 c1

Government revenues

Imports

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A question ...


DA S

P1 World price

P2 World Price + tariff

P

Q

What is the differences between the curves DA and DB? What are the implications thereof for the government?

DB

d'A1 d'A2 s'A sA dA

The effects of quotas


D

SD

q'

Pw World price

P* Domestic price

P

Q

E*

q*

Pq Dom.

Price w. quota

Import quota

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From import to export restrictions


Usually imposed on raw materials.

Fiscal revenue Development / 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 vis-à-vis their foreign competitors

Export duties Taxes and other charges Quotas and bans Minimum prices Non automatic licensing

The other side of trade policy: export promotion

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,

help import products the home nation does not produce

(e.g. Japanese JETRO)


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Export promotion bodies: the US case

US government export portal (http://www.export.gov): brings together resources from across the U.S. Government to assist American businesses in planning their international sales strategies

International Trade Administration (http://trade.gov/about.asp): strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements.

Export-Import Bank of the United States (http://www.exim.gov): official export credit agency of the United States. Assists in financing the export of U.S. goods and services to international markets

Overseas Private Investment Corporation (http://www.opic.gov): helps U.S. businesses invest overseas by managing risks associated with foreign direct investment


Foreign trade zones: the maquiladoras


Maquiladoras are Mexican assembly plants that manufacture finished goods for export to the United States. The maquiladoras are generally owned by

non-Mexican corporations. They take advantage of plentiful lower-cost Mexican labor, advantageous tariff regulations (lessened somewhat as a

result of the North American Free Trade Agreement), and close proximity to U.S. markets to produce such items as home appliances and automobiles.

from: http://www.answers.com/topic/maquiladora ; http://geo-mexico.com/?tag=urban&paged=3

http://www.export.gov/

http://trade.gov/about.asp

http://www.exim.gov/

http://www.opic.gov/

http://www.answers.com/topic/maquiladora

http://geo-mexico.com/?tag=urban&paged=3




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Import promotion (http://www.encyclopedia.com/doc/1G2-3045301092.html)

Import-promotion policies are measures intended to increase the volume of a country’s imports from a particular trading partner or group of trading partners.

Such policies may include bilateral agreements, bureaucratic directives, import subsidies, or procedures to improve foreign exporters’ information about domestic market opportunities

Voluntary import expansion (VIE) agreements

Preferential access to market

Import-promotion agencies

Import promotion is employed to smooth out political tensions arising from large bilateral trade imbalances (i.e. record trade surpluses of Japan and other East Asian countries during the 1980s)

More recently, advanced countries have used import promotion policies to assist potential exporters in developing and transition economies.


Assignment: Brazilian-Chinese trade relations

1. What is the nature of the Brazilian-Chinese bilateral trade pattern? How can it be explained?

2. What are the pros and cons thereof for both partners?

3. Why is Brazil applying protectionist measures, in particular on Chinese imports? What are these measures?

4. China is also expanding its foreign direct investment in Brazil. Why? What are the consequences thereof for Brazil?

Wrap-up question: in which sense are Brazilian-Chinese bilateral economic relations a perfect illustration of free trade theories’ strong points and shortcomings?


http://www.encyclopedia.com/doc/1G2-3045301092.html



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The case for protection

NON-ECONOMIC MOTIVES

Political issues

Strategic issues

Social issues


Various goals can be intertwined or in conflict Goals are dynamic: objectives may change over time

ECONOMIC MOTIVES

Non-economic justifications to trade policies

Protecting consumers from "dangerous" products

Protecting jobs (i.e. in declining industries)

Protecting "sensitive" industries (deemed important for national security)

Protecting human rights in exporting countries

Retaliating to unfair foreign competition (subsidies, dumping)

Furthering the goals of foreign policy (i.e. embargo)

Addressing demands from powerful interest groups (public choice)


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Public choice: the EU-US steel dispute


In March 2002 the US administration announced a complicated schedule of supposedly 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.

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

Economic motives (1): industry level

Promoting foreign direct investment / technology transfers

Protecting infant industries (dynamic theory of comparative advantage) (http://internationalecon.com/Trade/Tch100/T100-4.php)

Supporting the development of strategic industries and technologies (strategic trade policy)


http://internationalecon.com/Trade/Tch100/T100-4.php



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Protecting infant industries: the US case


Alexander Hamilton (January 11, 1755 – July 12, 1804)

Thomas Jefferson (April 13, 1743 – July 4, 1826)

New trade theory and strategic trade policy (STP)


Advantage to first mover

Oligopolistic markets

Barriers to entry

Capital intensive industries

Government's strategic trade policy

Trade promotion (domestic firms)

Trade restriction (foreign firms)

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Modelling STPs: the game theory


No subsidies

Airbus

Enters Does not enter

Boeing Enters -5 / -5 10 / 0

Does not enter 0 / 10 0 / 0

Subsidies (+10 to Airbus)

Airbus

Enters Does not enter

Boeing Enters -5 / 5 10 / 0

Does not enter 0 / 20 0 / 0

Economic motives (2): national level


The "large country" argument

An increase in tariffs at home will drive world

prices to fall

Economic development

Export promotion

Import substitution

The "national self-interest" argument

International trade and the prisoner's dilemma

Revenues for the government

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The effects of tariffs ("large" country)


D

S

d2

q1 q2

PW

P'W +

tariff

P* Domestic price

P

Q

E*

q*

s2

c2 c1

P'w

National self-interest and the prisoner's dilemma


GAINS FROM TRADE

COUNTRY A

FREE-TRADE PROTECTION

COUNTRY B

FREE-TRADE 800 / 800 300 / 900

PROTECTION 900 / 300 500 / 500

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Assignment: managerial implications


Generally speaking, trade barriers raise export costs and act as a constraint on firms' strategies

International firms have an incentive to lobby for free trade

Protectionism hazards (Paul Krugman)


Public choice

Strategic trade policies are likely to be captured by private interest groups who will distort it to their own ends

Negative impact on domestic economy

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

Retaliation and trade wars

Countries that enforce protectionist measures will probably provoke retaliation. Cross-retaliation may in turns lead to a trade war

http://www.economist.com/economics-a-to-z/r



international business environment - wiwi.uni-siegen.de · 06.07.2012 · import-promotion policies...

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