1. The Political Economy of International Trade
Chapter 7
The Political Economy of International Trade
Md. Afnan Hossain
Lecturer, School of Business & Economics

2. 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.
Many nations are nominally committed to free trade, but intervene to protect the interests of politically important groups.
The Opening Case: U.S. Tariffs on Tire Imports from China explores the implications of U.S. tariffs on imported tires. The tariffs were implemented after intense lobbying by union workers. However, not only did the WTO rule that the tariffs violated trade agreements, they also caused tire prices in the United States to rise significantly.

3. Instruments of Trade Policy
The main instruments of trade policy are:
Tariffs
Subsides
Import Quotas
Voluntary Export Restraints
Local Content Requirements
Administrative Polices
Antidumping Policies 3

4. Tariffs Tariffs are taxes levied on imports (or exports)
Specific tariffs are levied as a fixed charge for each unit of a good imported (e.g. $3 per barrel of oil)
Ad valorem tariffs are levied as a proportion of the value of the imported good (e.g. In March , the U.S. government placed an ad valorem tariff of 8% to 30% on imports of foreign steel)
Tariffs increase government revenues, provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods, and force consumers to pay more for certain imports
So, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy
Whether the gains to the government and domestic producers exceed the losses to the domestic consumers depends on various factors: amount of tariff, the importance of the imported good, the number of jobs saved in the protected industry, etc.
In the steel case of U.S., the consumers were the losers. WTO in November 2003 declared that tariffs represented a violation of the WTO Treaty and hence USA removed tariffs in that year in December.
E.g. of reducing economic efficiency: South Korea and production of rice at home country than anywhere else (low-cost producers). This points to inefficient use of resources. The land could have been used for growing other foodstuff, or residential or industrial purposes, that cannot be produced more efficiently elsewhere.
The US currently levies a 2.5% ad valorem tariff on imported automobiles. Thus if $100,000 worth of autos are imported, the US government collects $2,500 in tariff revenue. In this case, $2500 is collected whether two $50,000 BMWs are imported or ten $10,000 Hyundais. 4

5. Tariffs Export Tariffs These are far less common than import tariffs
In general export tariffs have two objectives:
to raise the revenue of the government and
to reduce exports from a sector, often for political reasons
Example: In 2004, China imposed a tariff on textile exports. The primary objective was to moderate the growth in exports of textiles from China, thereby alleviating tensions with other trading partners. 5

6. Subsidies Subsidies are government payments to domestic producers
Consumers typically absorb the costs of subsidies
Subsidies help domestic producers in two ways:
they help them compete against low-cost foreign imports
they help them gain export markets
Example: Developed nations gave $45 billion subsidies
to their automobile makers during the global financial crisis
between mid 2008 and early 2009.
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. 6

7. Quota
Import quotas directly restrict the quantity of some good that may be imported into a country. The restriction is usually imposed by issuing import licenses to a group of individuals or firms.
Example: USA on cheese import
Tariff rate quotas are 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.
Example: Tariff rate quotas are common in agriculture 7 7

8. Voluntary Export Restraints & Quota rent
Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government.
Example: USA on Japanese govt. on the export of automobiles.
A quota rent is the extra profit that producers make when supply is artificially limited by an import quota
Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods 8

9. Local Content Requirements
A local content requirement demands that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms (e.g. 75% of component parts of the product must be produced locally) or in value terms (e.g. 75% of the value of the product must be produced locally) Local content requirements benefit domestic producers, but consumers face higher prices. 9 9

10. Administrative Policies
Administrative trade polices are bureaucratic rules that are designed to make it difficult for imports to enter a country. These polices hurt consumers by denying access to possibly superior foreign products Examples: Japanese are the masters of this trade barrier. Tulip bulb exported from Netherlands to Japan is an example. 10

11. Antidumping Policies
Dumping refers to selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value
Dumping enables firms to unload excess production in foreign markets
Some dumping may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits
Antidumping polices (or countervailing duties) are designed to punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition 11

12. WTO & its Objectives
Since its establishment, the WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services
The agenda includes:
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws