Summary About Global Business There are many chapters about global business. I want you to choose just one chapter and summarize it for me. Choose what

Summary About Global Business There are many chapters about global business. I want you to choose just one chapter and summarize it for me.

Choose what suits you, the most important thing is that the number of words is between (1000 – 2000), provided that it does not increase or decrease. Chapter 7
Government Policy and International Trade

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives
LO 7-1 Identify the policy instruments used by governments to influence international trade flows.
LO 7-2 Understand why governments sometimes intervene in international trade.
LO 7-3 Summarize and explain the arguments against strategic trade policy.
LO 7-4 Describe the development of the world trading system and the current trade issue.
LO 7-5 Explain the implications for managers of developments in the world trading system. 

©McGraw-Hill Education.

2

Chapter 6 (trade theories) suggest that Free Trade is beneficial for individual countries.
It is mutually beneficial for the whole world and consumers in all the countries.
Then why do countries intervene in free trade (by trade barriers)? are governments unaware of the free trade benefits?
How do governments intervene in international trade?
What is the current world trading system and role of WTO?

.
What do we study in this chapter

©McGraw-Hill Education.

Introduction
What is the political reality of international trade?
Free trade occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
Nations nominally committed to free trade, but intervene to protect interests of politically important groups
Modern international trading system is based on General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).

©McGraw-Hill Education.

4
Free trade refers to the absence of barriers to the free flow of goods and services between countries.
General Agreement on Tariffs and Trade (GATT) International treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the WTO.

Instruments of Trade Policy 1 of 5
Learning Objective 7-1 Identify the policy instruments used by governments to influence international trade flows.

Governments use various instruments/methods (trade barriers) to intervene in markets including
Tariffs – taxes levied on imports that effectively raise the cost of imported products relative to domestic products
Specific tariffs – levied as a fixed charge for each unit of a good imported (For example: 3$ per barrel of oil)
Ad valorem tariffs – levied as a proportion of the value of the imported good
increase government revenues
force consumers to pay more for certain imports
are pro-producer and anti-consumer
reduce the overall efficiency of the world economy because they encourage domestic producers to manufacture goods that could be produced more efficiently elsewhere.

©McGraw-Hill Education.

5
Tariff A tax levied on imports.
Specific tariffs Tariff levied as a fixed charge for each unit of good imported.
Ad valorem tariff A tariff levied as a proportion of the value of an imported good.

Instruments of Trade Policy 2 of 5

Subsidies – government payments to domestic producers (Case- Subsidized Wheat Production in Japan)
Subsidies help domestic producers
compete against low-cost foreign imports
gain export markets
Consumers typically absorb the costs of subsidies
Agriculture sector is the biggest recipients of subsidies in most countries.
3. Import Quotas – restrict the quantity of some good that may be imported into a country
Tariff rate quotas – a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
A quota rent – the extra profit that producers make when supply is artificially limited by an import quota

©McGraw-Hill Education.

6
Subsidy Government financial assistance to a domestic producer.
Subsidies are government payments to domestic producers. They can be in the form of:
Cash grants
Low-interest loans
Tax breaks
Government equity participation in the company
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiency, and reduced trade.

Instruments of Trade Policy 3 of 5

Voluntary Export Restraints – quotas on trade imposed by the exporting country, typically at the request of the importing country’s government
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
5. Export Tariffs and Bans
Export tariff
Goal is to discriminate against exporting in order to ensure that there is sufficient supply of a good within a country
Export ban
Partially or entirely restricts the export of a good
Ex. 1975 ban on U.S. crude oil exports

©McGraw-Hill Education.

7
Import quota A direct restriction on the quantity of a good that can be imported into a country.
Tariff rate quota A direct restriction on the quantity of some good that may be imported into a country
Voluntary export restraint (VER) A quota on trade imposed from the exporting country’s side, instead of the importer’s; usually imposed at the request of the importing country’s government.
Quota rent Extra profit producers make when supply is artificially limited by an import quota.

As with tariffs and subsidies, both import quotas and VERs benefit domestic producers by limiting import competition. As with all restrictions on trade, quotas do not benefit consumers

Instruments of Trade Policy 4 of 5

6. Local Content Requirements
demand that some specific fraction of a good be produced domestically
benefit domestic producers
consumers face higher prices

7. Administrative Polices
Bureaucratic rules designed to make it difficult for imports to enter a country.
polices hurt consumers by limiting choice.

©McGraw-Hill Education.

8
Export tariff A tax placed on the export of a good.
Export ban A policy that partially or entirely restricts the export of a good.

Instruments of Trade Policy 5 of 5

8. Antidumping Policies – aka countervailing duties
Designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition
Dumping – selling goods in a foreign market below their costs of production or selling goods in a foreign market below their “fair” market value.
enables firms to unload excess production in foreign markets
may be predatory behavior – producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and later raise prices

©McGraw-Hill Education.

9
Local content requirement (LCR) A requirement that some specific fraction of a good be produced domestically.
Administrative trade policies Typically adopted by government bureaucracies that can be used to restrict imports or boost exports.

The Case for Government Intervention 1 of 5

Learning Objective 8-2 Understand why governments sometimes intervene in international trade.

There are two main arguments for government intervention in the market
Political arguments – concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
Economic arguments – concerned with boosting the overall wealth of a nation – benefits both producers and consumers

©McGraw-Hill Education.

10

The Case for Government Intervention 2 of 5

Political Arguments:
Protecting jobs – the most common political reason for trade restrictions
results from political pressures by unions or industries that are “threatened” by more efficient foreign producers and have more political influence than consumers.
Protecting industries considered important for national security – industries like aerospace or electronics are often protected because they are deemed important for national security.
Retaliating to unfair foreign competition – when governments take, or threaten to take, specific actions, other countries may remove trade barriers
if threatened governments do not back down, tensions can escalate, and new trade barriers may be enacted.

©McGraw-Hill Education.

11

The Case for Government Intervention 3 of 5

Protecting consumers from “dangerous” products – limit “unsafe” products.
Furthering the goals of foreign policy – preferential trade terms can be granted to countries that a government wants to build strong relations with
trade policy can also be used to punish rogue states
the Helms-Burton Act and the D’Amato Act, have been passed to protect American companies from such actions.
Protecting the human rights of individuals in exporting countries – through trade policy actions
the decision to grant China MFN (Most Favored Nation) status in 1999 was based on this philosophy

©McGraw-Hill Education.

12

The Case for Government Intervention 4 of 5

Economic Arguments:
The infant industry argument – an industry should be protected until it can develop and be viable and competitive internationally.
accepted as a justification for temporary trade restrictions under the WTO.
Question: When is an industry “grown up”?
Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government.

©McGraw-Hill Education.

13
Infant Industry Argument New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.

Oldest argument – Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil automakers – 10th largest – wilted when protection was eliminated.
Requires government financial assistance.
Today if the industry is a good investment, global capital markets would invest.

The Case for Government Intervention 5 of 5

Strategic Trade Policy – in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages.
governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage.

©McGraw-Hill Education.

14
Strategic trade policy Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market.

The Revised Case for Free Trade 1 of 1
Learning Objective 7-3 Summarize and explain the arguments against strategic trade policy.
When Should Governments Avoid Using Trade Barriers?
Retaliation and Trade War
Krugman – strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry boost national income at the expense of other countries
These policies will probably provoke retaliation
Krugman argues that since special interest groups can influence governments, strategic trade policy is almost certain to be captured by such groups who will distort it to their own ends.

©McGraw-Hill Education.

15

Development of the World Trading System 1 of 11
Learning Objective 7-4 Describe the development of the world trading system and the current trade issue.
Strong economic arguments for unrestricted free trade
Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit.
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)

©McGraw-Hill Education.

16

Development of the World Trading System 2 of 11
From Smith to the Great Depression
Case for free trade dates to late 18th century work of Adam Smith and David Ricardo
First embraced by Great Britain in 1846
Major trading partners did not reciprocate in free trade
Smoot-Hawley Act
Smoot-Hawley Act Enacted in 1930 by the U.S. Congress, this act erected a wall of tariff barriers against imports into the United States.

©McGraw-Hill Education.

17
Smoot-Hawley Act Enacted in 1930 by the U.S. Congress, this act erected a wall of tariff barriers against imports into the United States.

Free trade as a government policy was first officially embraced by Great Britain in 1846, when the British Parliament repealed the Corn Laws. The Corn Laws placed a high tariff on imports of foreign corn.

Development of the World Trading System 3 of 11
1947-1979: GATT, Trade Liberalization, and Economic Growth
Following the Great Depression, U.S. embraced free trade
GATT was designed to liberalize trade by eliminating tariffs, subsidies, import quotas, etc.
Tariff reduction was spread over eight rounds with great success

©McGraw-Hill Education.

18

Development of the World Trading System 4 of 11
1980-1993: Protectionist Trends
Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries.
Persistent trade deficits in the U.S
Use of non-tariff barriers increased (VERs)

©McGraw-Hill Education.

19

Development of the World Trading System 5 of 11
The Uruguay Round and the World Trade Organization
Uruguay Round sought to:
Extend GATT rules to cover trade in services
Develop rules on intellectual property
Reduce agricultural subsidies
Strengthen GATT’s monitoring and enforcement
The World Trade Organization
General Agreement on Trade in Services (GATS)
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

©McGraw-Hill Education.

20
GATT used “rounds of talks” to gradually reduce trade barriers.
Uruguay Round GATT 1986-93
Mutual tariff reductions negotiated.
Dispute resolution only if complaints were received.
GATT regulations could be circumvented using voluntary export restraints.

Development of the World Trading System 6 of 11
WTO: Experience to Date
By 2016, 164 members who account for 98 percent of world trade
Strong early start, since late 1990s unable to get agreements to further reduce barriers
Doha Round has shown very little progress
Limited protectionism returned following global financial crisis of 2008-2009
The Brexit vote and election of Donald Trump also suggest a move toward greater protectionism

©McGraw-Hill Education.

21

Development of the World Trading System 7 of 11
WTO: Experience to Date continued
WTO as global police
Positive effect
Countries involved have mostly adopted WTO’s recommendations
Expanded trade agreements
Global telecommunication and financial services industries

©McGraw-Hill Education.

22
The first two decades in the life of the WTO suggest that its policing and enforcement mechanisms are having a positive effect

Development of the World Trading System 8 of 11
The Future of the WTO: Unresolved Issues and the Doha Round
The current agenda of the WTO focuses on
The rise of anti-dumping policies
The high level of protectionism in agriculture
The lack of strong protection for intellectual property rights in many nations
Continued high tariffs on nonagricultural goods and services in many nations

©McGraw-Hill Education.

23
In 2001, the WTO began a new round of talks in Doha, Qatar.
Issues on the table at this round of meetings include cutting tariffs and industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of anti-dumping laws.

Development of the World Trading System 9 of 11
The Future of the WTO: Unresolved Issues and the Doha Round continued
Antidumping actions
Vague definition of what constitutes “dumping”
Concentrated in certain sectors: metal industries, chemicals, plastics, and machinery and electrical equipment
Protectionism in agriculture
Tariff rates generally much higher on agricultural products
Reflects desire to protect domestic agriculture
Raises consumer prices

©McGraw-Hill Education.

24

Development of the World Trading System 10 of 11
The Future of the WTO: Unresolved Issues and the Doha Round continued
Protection of intellectual property
TRIPS agreement
Market access for nonagricultural goods and services
Most developed nations have average tariff rates of 3.8 percent of value
Certain imports still have high tariffs, which limits market access and economic growth; Tariffs higher on services than industrial goods
WTO goal is to reduce tariff rates to zero

©McGraw-Hill Education.

25

Development of the World Trading System 11 of 11
The Future of the WTO: Unresolved Issues and the Doha Round continued
A New Round of Talks: Doha
Launched in 2001, still going on
Agenda includes:
Cut tariffs on industrial goods and services
Phase out subsidies to agricultural producers
Reduce barriers to cross-border investment
Limit use of antidumping laws
Multilateral and Bilateral Trade Agreements
Designed to capture gain from trade beyond WTO treaties.

©McGraw-Hill Education.

26
Multilateral and Bilateral Trade Agreements Reciprocal trade agreements between two or more partners.

In response to the apparent failure of the Doha Round to progress, many nations have pushed forward with multilateral or bilateral trade agreements, which are reciprocal trade agreements between two or more partners.

Focus on Managerial Implications
Learning Objective 7-5 Explain the implications for managers of developments in the world trading system.

Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm
Trade barriers raise the cost of exporting products to a country
Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country
To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise
Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies

©McGraw-Hill Education.

27

Case Study:
Subsidized Wheat Production in Japan
Japan

6-28

Case Study:
Subsidized Wheat Production in Japan

6-29

Case Study:
Subsidized Wheat Production in Japan
Japan is not a naturally suitable country for wheat production.
It imports 80% of its wheat from foreign producers.
Yet, Thousands of farmers grow wheat in Japan (with low output and high cost)
Govt. provide subsidies to the local farmers in order to compete with foreign producers.

6-30

International market price in year 2000 per bushel (around 21 kg) = $9
While local production cost= $ 35
Government Subsidy = $ 26 per Bh.
Total subsidy by the govt.= $ 700 millions
Where did Govt. covered this subsidy
Tariff rate quota.
The in-quota rate tariff = $0
over quota rate tariff= $500 per ton
The over quota tariff is so high that essentially cuts the supply and raise the price of wheat.

6-31
Case Study:
Subsidized Wheat Production in Japan

Japanese Ministry of Agriculture, Forestry and Fisheries (MAFF) has the sole rights to import wheat.
It imported in-quota wheat and sell on higher prices in the market. (quota over= High prices)
It purchased on international price of $ 5.96 per bushel and sold on $10.23.
Mark up = $4.27 per bushel (Quota Rent)
Earned $450 millions to cover some of the subsidy (rest would be paid by the consumer in terms of taxes)

6-32
Case Study:
Subsidized Wheat Production in Japan

Impact of trade barriers (Subsidy):
Wheat price is 80 to 120 % in Japan as compared to international market
Questions
How does this policy impact consumers?
What would be the state of wheat production in Japan if these trade barriers did not exist or if there was a free trade???
Who are the beneficiaries of this policy??
Why Japanese Govt. have such pro- producer and anti-consumer policies?

6-33
Case Study:
Subsidized Wheat Production in Japan

Answers
1. consumer pay higher prices
2. a. No domestic production at all
b. Consumers get high quality product at low cost
3. Thousands of farmers (politically important groups)
4. The farmers are voters and politically influential

6-34

Looking for this or a Similar Assignment? Click below to Place your Order