International Business

Submitted to:
Ms. Munira Sultana
Lecturer
Dept. of Business Administration

Dhaka City College

Submitted By:

PATHSHALA

Group no. : 06
Section: A
Members name Md. Ariful Haque Tahmina Akter Wahid Hossain Shams Zerin Chawdhuri Shayla Sultana Mala Id no. 21 26 30 73 367

Date of Submission: September 08, 2012

1 International Business What do you mean by protectionism? Protectionism is the economic policy of restraining trade between states through methods such as tariff on imported goods restricts quotas and a variety of other restrictive government regulation design to discourage imports and prevent foreign takeover of local market and companies. The term protectionism refers to a policy which protects business and workers within a country by restricting on regulating trade with foreign nation. The term Protectionism is used to denote a policy of encouraging the home industry by the use o f bounties or by the imposition of high customs duties on foreign products. The objects are to build up great national industries even by sacrificing on the part of existing consumers. Protectionism preserves the available foreign exchange for the import of capital equipment, essential raw materials and the technical know-how so urgently needed to give a push the development process. Protectionism strengthens the economy of under developed countries and increases the GNP and eventually results in the expansion of international trade. In a nutshell, protectionism is an essential ingredient of planned economic development for which control and regulation of all economic activity are very necessary.

What is Free Trade? Free trade is a policy of no restrictions on the movement of goods between countries. Restrictions placed with a view to safeguarding home industries constitute the policy of protectionism. In the words of Adam Smith, the term free trade has been used to denote that system of commercial policy which draws no distinction between domestic and foreign commodities and therefore, neither imposes additional burdens on the latter, nor grants any special favors to the former. The doctrine of free trade is the extension of the doctrine of division of labor to the international field. So the free trade is that such a policy enables every county to devote itself to those forms of production for which it is best suited on the basis of comparative advantages. Reasons for free trade: 1. 2. 3. 4. Ensure efficiency and maximize world output. Reduce cost of production. Ensure competitions. Promote world peace.

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2 International Business Why protectionism is considered a barrier to international trade?

Protectionism: The term protectionism is used to denote a policy of encouraging the home industries by the use of bounties or by the imposition of high customs duties on foreign products. Reasons for considering a barrier to international trade: Import Prohibition: Sometimes import of certain commodities is prohibited by law or allowed only under defined conditions. Sometimes countries indirectly curtail imports by refusing to export certain materials until they have been processed at home. Exchange Control: Exchange control implies government interference with the buying and selling of foreign exchange. In this way, foreign trade is curtailed and driven into fixed channels. Government may allot exchange or ratio it out so that importers can buy only a limited amount of goods in foreign countries, or they may block exchange. Customs Duties: This is an old method and consists in imposing import or export duties on goods coming into, or going out of the country, respectively. Import duties are more common than export duties. A duty is said to be specific when it is imposed according to a standard of weight or measurement. Customs duties or tariffs may have either revenue or protection as their aim. Preferential Treatment: Sometimes discrimination is made in the rate of duties with regard to different countries. Moreover, countries whose goods pay higher duties may retaliate and impose high duties on the discriminating country in return. Quota Restrictions: 1. Customs quota 2. Import quota Customs Quota: Allow a certain amount of commodities at a favorable duty beyond this normal duty is charged the limits are settled by agreements. Import Quota: An import quota is a direct restriction on the quantity of same goods that may be imported into a country this restriction is normally enforced by issuing import licenses to a group individual firm.

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3 International Business Import Licenses: Under this system the govt. does not allow import of certain goods without a license being obtained by the importer. In this way, imports can be cut down and certain goods discriminated against. Import Monopolies: The govt. may take the import of goods a state monopoly as Russia does, and thus reduce imports or discrimination against certain countries. Conclusion: We may conclude in Samuelssons word, A system of prohibitive tariff puts at society inefficiently inside the consumption possibility frontier that would be available if the efficiencies of international exchange and division of labor were utilized. This is absolutely true for the world as a whole, and particularly true for a country that cuts off all imports and becomes self-sufficient.

Nurse the baby, protect the child and free the adult- explain The policy of protection has been well expressed in the following words: Nurse the baby, protect the child and free the adult. A new industry having a potential comparative advantage may not get started in a country unless it is given temporary protection against foreign competition. An established industry is normally stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power etc. Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequal and this would result in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of an unequally powerful foreign industry, it will be denying the country the chance to develop the industry for which it has sufficient potential. The intention is not to five protections for ever but only for a period to enable the new industry to overcome its teething troubles. The infant industry argument, however, has not been received favorably by some economists. They argue that an infant will always be a infant if it is given protection. Further, it is very difficult for a government to identify an industry that deserves infant industry protection. The infant industry argument boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective.

How is protectionism implemented through Tariff, Quotas & Embargoes?

Protectionism is the economic policy of that is closely related with anti-globalization and contrast of free trade. Protectionism occurs when it is controlled by the government of the country through different protective measures.
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4 International Business

Thus protectionism is a system of international trade where by government interrupts protective measures like
1. Tariff 2. Quotas 3. Embargoes.

Protectionism implemented through tariff, quotas and embargoes. The way of these are explain in below
Tariff:

Tariff is one kind of tax charged by government of a country to restrict import from other countries to protect the home industry which products those goods domestically. Protectionism implemented through tariff. A government may assess a tariff on a per unit basis, in which case it is applying a specific duty. It may assess a tariff as a percentage of the value of the item, in which case it is an ad-valorem duty. If it assesses both a specific duty and an ad-valorem duty on the same product, the combination is a compound duty. A specific duty is straight forward for customs officials who collected duties to assess because they do not need to determine a good value on which to calculate percentage tax.
Quotas:

An import quota specifies the maximum amount of a commodity which may be imported in any period. Import quotas can more effectively retard international trade than tariffs. A product might be imported in large quantities despite high tariff, but a low import quota can effectively restrict imports of foreign goods. Protectionism implemented through quotas, this statement are explain in below An import quota is a direct restriction on the quantity of some goods that may be imported into a country. The restriction is normally enforced by issuing import license through a group of individuals or firms. Different country provides quota restriction on their basic industry like:
India USA Canada Garments Cosmetics Rice

Embargo:

A specific type of quota that prohibits all forms of trade is an embargo. It is an absolute ban on all types of export and import to a particular destination.

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5 International Business

Protectionism implemented through embargo, this statement are explained by an example that is given in below Embargo arises due to high politically hostilities not because of economic reason between two countries. Example: the UN imposed economic embargo on Iraq after invaded Qatar in 1990, and recently the USA imposed embargo on North Korea on nuclear energy issue.

How protectionism implemented through anti-dumping and administrative policy?

Protectionism is a system of international trade where by government interrupts trade between nations through various protective measures like - tariff, quotas subsidies, and embargoes, antidumping and administrative policy. Anti dumping policy: 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. Anti dumping policies are designed to punish foreign firms that engage in dumping. Protectionism implemented through anti-dumping policy. Although anti- dumping policies vary somewhat from country to country, the majority are similar to those used in the United States. If a domestic producer believes that a foreign firm is dumping production in the US market, it can file a petition with two government agencies, the Commerce Department and the International Trade Commission. For example: In the Korean DRAM case, Micro technology, a US manufacturer of DRAMs filed the petition. The government agencies then investigate the complaint. If a complaint has merit, the Commerce Department may impose an anti dumping duty on the off endings foreign imports. Administrative policy: Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. Protectionism policy implemented through administrative policy are explained with an example that is given in below At one point the Netherlands exported tulip bulbs to almost every country in the world except Japan. In Japan customs inspector insisted on checking every tulip bulb by cutting it vertically down the middle and even Japanese ingenuity could not put them back together.

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6 International Business Discuss the instruments used in protectionism policy.

The term protectionism refers to policy which protects business and workers within a country be restricting or regulating trade with foreign nation. The instruments of protectionism policy are given below.
specific Tariff advalorem compound subsidies quota voluntary export restraint(VER) ban of import Non-tariff embargoes local content requirement(LCR) anti-dumping policy administrative policy

Tariff: Tariff is a tax imposed on a imported goods. It is the fiscal tool used by the govt. to restrict imported goods and to protect local industry which produces those goods domestically. Instruments of tariff: 1. Specific tariff: Specific tariff assessed as a fixed charge for cash units of goods imported. For example, $3 imposed for per barrel of oil imported from USA. 2. Ad-valorem tariff: It is assessed as a percentage of a market value of the imported goods. For example, 25% tax on car. 3. Compound tariff: It is the combination of both ad-valorem tariff and specific tariff. For example 10% advalorem tariff and 15% per kg specific tariff on imported sugar.

Instruments of Protectionism policy

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7 International Business

Effects of tariff: 1. A tariff raises a cost of imported goods related to domestic product. 2. The principle objective of tariff is to protect domestic producer and employee against foreign competition. 3. Raises govt. revenue. 4. Domestic producers gain rises because the tariff gives them some protection against the foreign competitors. 5. Consumers are suffering because they must pay more for certain imports.

Non-tariff: Any government regulation policy or procedure other than tariff that effect of international trade is called non-tariff. Subsidy: A subsidy is a govt. payment to a domestic producer by lowering production cost to help them compete against foreign imports and help them to gain export market. Subsidy takes many forms including cash, low interest loans, tax rates, govt. equity participations in domestic firms. Effects of subsidy: 1. Subsidy occurs domestic producers whose international competitiveness is increased as a result. 2. Subsidy helps a firm emerging industry. 3. Subsidy must be paid for. 4. Govt. pays for subsidy by taxing individual.

Quota: An import quota is a direct restriction on the quality some goods that may be imported into a country. The restriction is normally enforced by issuing import license to a group of individuals or firms. Voluntary export restraint (VER): VER is a quota on trade imposed by the exporting countries govt. For example, Japanese automobile producer impose VER on auto export to the USA in 1981. These VER limit Japanese export 1.68 million per year. Ban of import: It is an extreme form of quota is a total ban on product importation some countries may totally prohibits import of specific goods as a means of developing local industry. For example, in 1984 Brazilian informatics low the importation of PC to stimulate the Brazilian electronics industry.

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8 International Business Embargo: Specific types of quota all forms of trade is called embargo. It is an absolute ban on all types of export and import to a particular destination. For example, when Iraq invaded Kuwait in 1990 the UN imposed embargo on trade. Local content requirement (LCR): LCR is a restriction requiring that some specific fraction of a goods be produced domestically. The requirement can be expressed in two ways. 1. In physical terms: 75% of the component part for this product must be produced locally. 2. In value term: 75% of the value of this product must be produced locally. Example: Poland requires that all lyrics commercial be sung only in Polish. There by forcing firms over their commercial similarity Australia limits imported TV adds thus forcing firms to re-show in Australia using local actors and directors. Anti-dumping policy: Dumping is define as selling goods in a foreign market at low their cost of production or as selling goods in a foreign market at below their fair market value. Anti-dumping policy is the policies design to punish foreign firms that engage in dumping and protect domestic firms from unfair foreign competition. Administrative policy: Administrative trade policy is a bureaucratic rule that is design to make difficulties for imports to center into a country. It is commonly believed that the Japanese are the master of these kinds of barriers. It is an instrument of restricting the import products into the market.

What according to you are the major non-tariff barriers to expand trade between India and Bangladesh? Any government regulation policy or procedure other than a tariff that has the effect of restraining international trade may be called as non-tariff barriers. The major non-tariff barriers are as follows: Sanitary & Photo-sanitary Standard: Non-tariff measures relating to compliance with sanitary and photo-sanitary standards are often turned into non-tariff barriers and technical barriers to trade by India. Sensitive and negative item list: Bangladeshs main export items cant get access to Indian Market because they are include in Indias sensitive list of 480 items, which include agricultural and textile products. Indias negative list includes 744 items. Bangladesh negative list includes 1249 items. For example, even the knitwear garments of Bangladesh could not yet get unhindered access to the Indian market.

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9 International Business Underestimating Product: Bangladeshi products are supposed to get national treatment from India, but they do not get it. Poor facility in Indian land port: Poor logistic of most of the Indian land ports, no customs co-operation or joint inspection, lack of warehouse in most of the Indian land ports, no testing facilities in any Indian land port bordering Bangladesh etc. are major hurdles in the way of smooth movement of goods exported by Bangladesh to India. Quality standard are not accepted by India: Non-tariff barriers in India like testing and certification, technical standards and banking regulations seriously hamper trade. For example, quality standard certificate from Bangladesh is not accepted by India. Visa problem: Business people from Bangladesh complain of visa restrictions that make it difficult to travel to north eastern states of India. Anti-Bangalee Sentiment: Some Bangladeshi traders complain that there are anti-bangalee sentiments among a section of the indigenous communities of seven sisters.

Prohibition of opening Bank Account: Normally, the Bangladeshis are not allowed to open bank account in the north eastern states of India and the export-import number is issued from Kolkata. Discrimination in Port area: In Benapole, the Indian trucks are allowed to proceed up to 500 yards of the zero point inside Bangladesh without checking, but the Bangladeshi trucks are allowed to go up to 100 yards of the zero point inside India on the Petra pole side. This discriminatory practice is quite peculiar. Exporters from Bangladesh stressed the need for opening Bangladesh consulate offices at the deputy High commissioner levels in Agartala, Shillong. These are the non-tariff trade barriers between India and Bangladesh.

What are the various arguments against protectionism policy? Protectionism is an essential ingredient of planned economic development for which control and regulation of all economic activity are so very necessary. The term protectionism is used to denote a policy of encouraging the home industries by the use of bounties or by the imposing of high customs duties on foreign products. Arguments against protectionism: The usual arguments against protectionism are given below.

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10 International Business i. Vested interests are created. Once certain industries are given protection, they claim, it as a matter of right. It then becomes very difficult to take away protection. The infants begin kicking if you touchy them in any manner. Such infants refuse to admit that they have grown into adults. Protection produces lethargy and acts like an opiate. When foreign competition has been removed, it sends the home manufactures to sleep, as it were. They do not try to make any improvement, and technical progress comes to a standstill. Then there is the danger of corruption. The industrialists bribe legislators so that protection is not taken away. Protection creates monopolies. Tariff is said to be the mother of trusts when foreign competition has been removed the home manufacturers are tempted to combine to reap monopoly profits. Consumers and unprotected industries suffer. This is so because imposition of import duties invariably leads to the rising of prices. The distribution of wealth becomes more unequal. Protections favor the rich capitalistic who grow still richer. Protection leads to conflicts, friction, and retaliation in international dealings. The most important argument against protection on economics grounds is that it militates against optimum utilization of resources. It hampers international division of labor so that labor, capital and other factors of production do not find their most remunerative employment, their distribution is not governed by natural economic forces but they are artificially forced into certain channels.

ii.

iii. iv.

v. vi. vii. viii.

The result is that they do not make their maximum possible contribution in the production of commodities. So these are the arguments against protectionism.

What are the various arguments for protectionism policy?

The Infant Industry Argument: The infant industry argument is by far the oldest economic argument for government intervention. Alexander Hamilton proposed it in 1792. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition. Strategic Trade Policy: Some new trade theorists have proposed the strategic trade policy argument. The strategic trade policy argument has two components. First, it is argued that by appropriate actions, a government

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11 International Business can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. The second component of the strategic trade policy argument is that it might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages. Protecting Jobs and Industries: Perhaps the most common political argument for government intervention is that it is necessary for protecting jobs and industries from unfair foreign competition. The tariffs placed on imports of foreign steel by President George W. Bush in March 2002 were designed to do this. National Security: Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics, semiconductors, etc.). Retaliation: Some argue that governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to play by the rules of the game. Protecting Consumers: Many governments have long had regulations to protect consumers from unsafe products. The indirect effect of such regulations often is to limit or ban the importation of such products. In 1998, the U.S. government decided to permanently ban imports of 58 types of military-style assault weapons. Protecting Human Rights: Protecting and promoting human rights in other countries is an important element of foreign policy for many democracies. Governments sometimes use trade policy to try to improve the human rights policies of trading partners. Employment: It is argued that industrial development through protection increases employment in a country. Conversely, if protection is not given to old established industries; foreign competition may ruin them and create unemployment in the country. These are the arguments for protectionism trade policy.

Do you think protectionism policy is essential for the economy of Bangladesh? Define your position?

International business plays an important role in the economy of any developing country like Bangladesh. In the case of international business in Bangladesh protectionism policy is very important for removing the power of developed countries. Now the importance of protectionism policy in Bangladesh economy is as follows:Prepared by: Group Pathshala

12 International Business

Increase productive power: Bangladesh is the agricultural based country. To increase the agricultural production and efficiency protectionism policy is must be needed for Bangladesh. `` The case of protection with view to building up productive power is strong in any agricultural country which seems to possess natural advantages for manufacturer --- Professor A.C.Pigou. Capital formation: In Bangladesh, protectionism policy is essential in case of capital formation. If reduce the import cost, it is possible to reserve the foreign currency and import for foreign raw materials, labor etc. For this, the economy may be developed. For developing the economy, capital formation is most needed. For developed the economy and formation of capital protectionism policy must be essential. Increase gain from trade: To use the protectionism policy it is possible to increase the gain from trade. In case import, if impose the protectionism tax then it not only increase the government revenue but also increase the export income that increase gain from trade. Invites foreign capital: To impose the protectionism tax, it increases the foreign capital. For this reason, the economy of the country may strong or developed. Increases GNP: The protectionism policy develops the economy condition. Protectionism policies are increases GNP of the country by imposing tax on import and encourage to increases the production of export. Self-sufficiency in defense: In the Bangladesh, there are most essential to self-sufficiency in defense. If the protectionism policy applies in the defense industry then it can possible to produce the defense equipment in the country and cannot be depended in other foreign country. Employment: For apply to protectionism policy it is possible to increases the employment of a country. Protectionism policy reduces the production of import products. For this reason, many industries build up in the country and which create more employment opportunity. Proper utilization of natural resources: For the protectionism policy, it has an opportunity to produce the raw materials into the country. For this, it can possible to make proper utilization of natural resources.

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Favorable balance of payments: In the developing country, there is unfavorable balance of payment. For this reason, the economic condition cannot be developing properly. By applying protectionism policy, the export income become more then import cost and it make favorable balance of payments. Industrial intra-structure: For protectionism, the industrial intra-structure may be strong. There arises many service and basic product production industry and organization. For this, there are economic development may occur. About the discussion, it can say that protectionism policy can develop the economic condition of Bangladesh. So, it is importance for the Bangladesh economic growth and development.

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