Instruments of Business & Trade

Lecture 8

MGT372: INTERNATIONAL BUSINESS

Instruments of Business & Trade

TARIFF
Tariff
Taxes on imported goods for the p g purpose of raising their price to reduce competition for local producers or stimulate local production. An import duty levied as a percentage of the invoice value of imported goods A fixed sum levied on a physical unit of an imported good

Ad Valorem Duty Specific Duty

COSTS & BENEFITS OF TARIFFS

A tariff raises the price of a good in the importing country and lowers it in the i ti t dl i th exporting country. As a result of these price changes:
Consumers lose in the importing country and gain in the exporting country. e po ting co nt Producers gain in the importing country and lose in the exporting country. Government imposing the tariff gains revenue.

BASIC TARIFF ANALYSIS

Modern governments usually prefer to protect domestic industries through a variety of non-tariff barriers, such as:
Import Quotas Export Restraints
Limit the quantity of imports Limit the quantity of exports

Th when nations use these non-tariff Thus h ti th t iff barriers, they can influence the price which eventually influences the demand supply.

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Instruments of Business & Trade

Lecture 8

IMPORT QUOTAS
Import quotas directly restrict the quantity of some good that may be imported into a country. country This may be done through issuing licenses to firms that import. A quota rent is the extra profit that producers make when supply is artificially limited by an import quota. Import quotas benefit domestic producers by limiting import competition, but they raise the prices of imported goods because quantity demanded will exceed quantity supplied.

VOLUNTARY EXPORT RESTRAINTS

Voluntary export restraints are similar to import quotas impo t q otas on trade except that the t ade e cept quota is imposed by the exporting country, typically at the request of the importing countrys government. VERs are losses for the importing country because there is a price tag for that quota request.

LOCAL CONTENT REQUIREMENTS

A local content requirement demands that some specific fraction of a final good to be produced domestically.
LCRs provide a similar protection to the import quotas. Local content requirements benefit d b fit domestic producers, but consumers ti d b t face higher prices.

ADMINISTRATIVE POLICIES
Administrative or bureaucratic trade polices are bureaucratic rules that are designed to make it difficult for imports to enter a country.
Examples include, safety requirements, q quality assurance, customs regulations, y , g , meeting religious requirements, delays, formalities, etc. These policies can act as a form of protection and trade restriction.

Why should governments go for LCRs?

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Instruments of Business & Trade

Lecture 8

EMBARGOES AND SANCTIONS

Embargo is the prohibition of business and trade imposed by a particular nation to another nation. It is a legal barrier (not an economic barrier) to trade. Reasons for embargoes:
Terrorism Upholding human rights Expression of hostility Punishment However, embargoes and boycotts are not the same.

PRICE & EXCHANGE CONTROLS

Price Controls
Government regulation of prices of goods and services; control of the prices of imported goods or services as a result of domestic p political pressures. p

Exchange Controls
Controls on the movement of capital in and out of a country, sometimes imposed when the country faces a shortage of foreign currency.

WHICH INDUSTRIES ARE GENERALLY PROTECTED?

Agriculture in the U.S., Europe, & Japan
Japans 1000% tariff on imported rice Japan s rice, Americas sugar quota.

PREFERENTIAL TRADING AGREEMENTS

FTA: agreement that allows free trade among
members, members but each member can have its own trade policy towards non-member countries Customs Union: agreement that allows free trade among members and requires a common external trade policy towards non-member countries Trade creation: occurs when high cost domestic production is replaced by low cost imports from other d ti i l db l ti t f th members. Trade diversion: occurs when low cost imports from non-members are diverted to high cost imports from member nations.

Clothing textiles (fabrication of cloth) and apparel (assembly of cloth into clothing) Automobile (manufacturing resources such as steel, glass, etc) Electronics (Electrical and technology products for industrial usage)

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Instruments of Business & Trade

Lecture 8

ANTI-DUMPING
Dumping refers to selling goods in a foreign market below their costs of production, production or selling goods in a foreign market below their fair market value. Dumping enables firms to unload excess production in foreign markets. Antidumping polices (or countervailing duties) are designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition.

SUBSIDIES
Subsidies are government payments to domestic producers. They can be in the o o form of:
Subsidies help domestic producers in two ways:
Help compete against l t foreign imports t low-cost f i i Help them gain export markets

Cash grants, Low-interest loans, Tax breaks or Government equity participation in the company

Subsidies encourage or discourage trade?

INFANT INDUSTRY ARGUMENT

Developing nations may have a potential comparative advantage in some industries, but they cannot initially compete with well established industries of other countries. To allow these industries to establish, the infant industry argument suggests that an y protected until it can industry should be p develop and be viable and competitive internationally. However, it can be difficult to gauge when an industry has grown up.

SRATEGIC TRADE POLICY

Strategic trade policy suggests that in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages. St t i t d policy also suggests th t Strategic trade li l t that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage.

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Instruments of Business & Trade

Lecture 8

OTHER INSTRUMENTS OF TRADE

Export credit subsidies
A subsidized loan to exporters Export-Import banks of a nation subsidizes loan to local exporters

POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION

Concerned with protecting the interests of certain groups within a nation, often at the expense of other groups.
1. Protecting Jobs and Industries 2. National Security 3. Retaliation 4. Protecting Consumers 5. Furthering Foreign Policy Objectives 6. Protecting Human Rights

Government procurement
Government agencies are obligated to purchase from domestic suppliers, even when they charge higher prices (or have inferior quality) compared to foreign suppliers.

REVISED CASE FOR GOVERNMENT INTERVENTION

Retaliation and Trade War
Strategic trade policy provokes retaliation and may result in trade wars, leading to trade distortions

Domestic Politics
Governments do not always act in the national interest when they intervene in the economy, and are usually influenced by politically important interest groups

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