NATIONAL TRADE POLICIES

CHAPTER 5: Formulation of National Trade Policies LEARNING OBJECTIVES To present the major arguments in favor or against governmental intervention in international trade To look at the rationales presented for trade intervention To look at different barriers to international trade enacted by governments To see how governments try to promote international trade

Against intervention: (Free Trade) Government should exert minimal influence on importing and exporting decisions of private firms… Adam Smith and followers. (Increase in world production, resources allocated efficiently, more and better goods available to citizens, the “Invisible Hand” can do a much better job than politicians. Arguments in Favor or Against Government Intervention in Trade In favor. Government control in some areas Changes in industries might be followed by changes in demographics. Some industries should be protected for national safety. Some industries should be protected until they mature. The invisible hand is not fair many times. It takes time and a whole nation might suffer… Votes…votes…votes…votes…

Although the belief and trend today is more “free” trade still governments intervene. Why? They believe that the game is not fairly (on equal terms) played by all countries and they have to protect themselves. Therefore, today we see what is called fair on managed trade. Intervening to ensure that foreign and domestic firms can compete on “equal terms”. How? By either enacting policies around exports or around imports. Today… Reality

A. National Defense Argument A government might want to keep an industry alive since there is always the case of war. Vital raw materials (steel, rice, wool) will be needed in such a case. Japan is protecting its rice industry, USA its ocean transportation. England its steel industry…) Rationales for Trade Intervention B. Infant Industry Argument Newly-built industries (infant) are still babies and cannot compete against the big giants yet. Therefore, the government will help them until they mature. However, once the industry matures the country should be willing to remove protection. Also, the criterion for the selected industry should be economic and not political. (Japan… no tariff on copper, steel,, aluminium for major industries)

C. Maintenance of Existing Jobs Communities might suffer (factories closing down) especially in the case of dumping (selling by a firm of its products outside its domestic market at prices below those it charges in its domestic market). Low-wage countries are a threat to many high-wage countries. Economies and communities suffer. Change in demographics is seen, urbanization, pollution, crime. D. Strategic Trade Theory In industries of high cost (e.g. nuclear energy) the market cannot support more than one company. The government intervenes to subsidize the domestic firm so as for the money to stay within the country and all the jobs are occupied by citizens of the country.

E. Economic Development Programs When the major goal is economic development (especially in developing countries) diversification, export promotion or import substitution strategies might be seen. The corresponding industries will then be helped. Some countries in order not to heavily rely on tourism, oil … have helped other industries Other countries are heavily subsidizing major export industries or having tariffs and quota on imports F. Public Choice Analysis Policies are many time enacted due to high interest and energy of special interest groups that fight and convince of their rights the politicians. The general public shows no interest and therefore the special interest group wins the case. Under such a scenario the politicians will not go against them since they want the votes.

Barriers to International Trade Tariffs a form of tax or duty paid on goods shipped internationally Ad valorem a percentage on the value of the goods (sale price) e.g. 3% on potatoes – therefore for a €300 value, €9 will be paid. Specific tariffs specific amount of cents or euro charged on some physical unit. E.g. 3 cents per kilo of tomatoes Compound tariffs. A mix of ad valorem and specific e.g. 10 cents per kilo of shrimps plus 15% on total value Information regarding tariffs can be seen in a country´s harmonized tariff schedule. The difficulty is when you import a product that is not identical to the products included in the tariff schedule. A. Tariffs generate revenues for the government and also raise the costs of importing local production is more competitive.

1.Quotas Quantity limits on the number of units that may be imported. E.g. agricultural, chicken industries… Quotas might also be imposed for political reasons 2.Numerical Export Controls Quantity limits imposed on exports (usually for political reasons) When the limit is zero, then we call it an embargo 3.Other nontariff barriers These may range from bureaucratic delays in processing requests for import permits to quality standards, packaging, restricted access to distribution channels, currency control and others. B. Nontariff barriers: Any other trade barrier with an intent to discourage or limit imports.

A.Subsidies Might be in the form of providing free land, lower electricity rates, tax breaks, loans at lower rates, money directly to producers, helping with the infrastructure… B. Foreign Trade Zones An area within a country where duties (import or export) are reduced or eliminated entirely so as to spur economic activity. It can be an area smaller than a village. C.Export Financing Programs Governments help domestic companies by providing attractive finance packages or insurance. This is seen in the case of manufacturing very expensive items or in dealing with countries of high political risk (EXIM bank). (Boeing Vs Airbus) Promotion of International Trade

A CASE OF UNFAIR TRADE AND GOVERNMENT INTERVENTION: DUMPING When foreign firms sell outside their country at prices lower than domestic (home) prices Example: Desmarais in Canada – a photo album producer Desmarais believes that Korean competitors offer their photo albums in Canada at prices lower than the prices they sell in Asia (even below their costs), in order to drive them out of the market. Desmarais took the case in court asking for enforcement of antidumping laws against Korean companies. Desmarais won the case against the Korean companies However, the Korean cos. Started producing in other countries and sending their albums from there where there was no case. Other complaints followed by Desmarais against other countries. Then the Korean cos. moved somewhere else. Dumping can plaque a firm for ever