chapter 9

Formulation of National
Trade Policies

International Business, 6th Edition

Griffin & Pustay

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Rationales for Trade Intervention

Should a national government intervene to protect the countrys domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?

Should a national government directly help the countrys domestic firms increase their foreign sales through export subsidies, government-togovernment negotiations, and guaranteed loan programs?

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Free Trade or Fair Trade?

Free Trade

Fair Trade

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Industry-Level Arguments
National Defense Infant Industry Maintenance of Existing Jobs Strategic Trade

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National Defense Argument

Country must be self-sufficient in critical raw materials, machinery, and technology or else be vulnerable to foreign threats
Appeals to general public Protects steel, electronics, and machine tools industries, and merchant marines

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Infant Industry Argument

Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established Powerful economic development strategy
Which industries should be protected? For how long?

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Maintenance of Existing Jobs

Jobs in high-wage countries threatened by imports from lowwage countries Forms of assistance
Tariffs

Quotas

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Strategic Trade Theory

Strategic trade theory suggests that a national government can make its country better off if it adopts trade policies that improve the competitiveness of its domestic firms in such oligopolistic industries.

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STP Example
Boeing
Develop Do not develop

Develop

-1 -1 10 10

Airbus 0 0
Do not develop

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STP Example: Subsidy Effects

Boeing
Develop Do not develop

Develop

-1

Airbus
Do not develop

-1+2=1
10 0

10 + 2 = 12
0 0

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In the News: EADS Deal

EADS European Aeronautic Defense and Space Company Was fighting for a $35bn order to build refuelling tankers for U.S. Air Force Boeing was supplying tankers to Air Force for the last 50 years Pros: Business reasons; EADS domestication; Boeing 2002 scandal Cons: Security implications; employment in US Boeing wins

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National Trade Policies

Economic Development Programs Industrial Policy

Public Choice Analysis

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Economic Development Programs

Export Promotion Strategy

Import Substitution Strategy

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Industrial Policy
When industrial policy is pursued, the national government identifies key domestic industries critical to the countrys future economic growth and then formulates programs that promote their competitiveness.

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Public Choice Analysis

Special interest groups are willing to work harder for the passage of laws favorable to their interests than the general public is willing to work for the defeat of laws unfavorable to its interests.

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Map 9.1 An Effect of the Jones Act

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Barriers to International Trade

Tariffs: tax placed on a good that is traded internationally
Non-tariff Barriers: governmental controls on international trade

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Tariff Barriers to International Trade

Export tariffs Ad valorem Import tariffs Specific Compound

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Reasons for Tariffs

Tariffs raise revenues for national governments
Tariffs act as a barrier to trade

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Figure 9.3 Impact of an Import Tariff on Demand for U.S.-Made SUVs

Quantity of U.S.-made SUVs

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Nontariff Barriers
Quotas
Numerical export controls

Public-sector procurement policies

Regulatory controls

Product and testing standards

Restricted access to distribution networks

Currency controls
Investment controls Local-purchase requirements

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Figure 9.4 Tariff Rate Quota on Widgets

A tariff rate quota imposes high tariff rates on imports above the threshold level.
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These Indian sugarcane workers receive less for their crops because of the tariffrate quota imposed by the U.S.

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Other Nontariff Barriers

Product and testing standards
Restricted access to distribution networks Public-sector procurement policies

Local-purchase requirements
Regulatory controls Currency controls Investment controls

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Figure 9.5 Types of Barriers to International Trade

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Promotion of International Trade

Subsidies Foreign Trade Zones

Export Financing Programs

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Map 9.2 Foreign Trade Zone on Mauritius

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Controlling Unfair Trade Practices

International Trade Administration (ITA)
Division of U.S. Department of Commerce Determines whether an unfair trade practice has occurred Confirmed cases transferred to U.S. International Trade Commission (ITC)

Two types of unfair trade practices

Government subsidies Unfair pricing practices
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Controlling Unfair Trade Practices

Countervailing Duties

Antidumping Regulations

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Objectives of Unfair Trade Practice Laws

Promote global efficiency by encouraging production in those countries that can produce a good most efficiently Ensure that trade occurs on the basis of comparative advantage, not the size of government subsidies Protect consumers from predatory behavior
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