1. The political economy of international trade
Dr. Adam Novotny International Business

2. Why and how do governments intervene in international trade?
To restrict imports and promote imports
To protect domestic producers and jobs from foreign competition
To increase the foreign market for home products
To raise revenue for the government
HOW?
Instruments of trade policy:
Tariffs
Subsidies
Import quotas
Voluntary export restraints
Local content requirements
Administrative policies
Antidumping duties
Novotny, 2011

3. TARIFFS Tax levied on imports. Types: Who wins? Who loses?
Specific: fixed charge for each unit imported ($3/barrel of oil)
Ad valorem: levied as a proportion of the value of the imported good (15% on the first 2 million tons of bananas)
Who wins? Who loses?
Domestic producers & government gains, but consumers (higher prices) and the „world” loses (inefficient utilization of resources)
Balance depends on
Amount of tariff, importance of good, number of jobs saved
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4. SUBSIDIES Government payment to a domestic producer. Types:
Cash grants
Low-interest loans
Tax breaks
Government equity participation in domestic firms
Helps domestic producers to compete against foreign import and to gain export markets
Helps firms to achieve dominant position: first-mover advantage!
Amount:
in agriculture: ~ 50% (Japan: 62%, EU: 43%, USA: 22% of farm revenues)
In industry: ~ 0-2%
Consequences:
Inefficient farmers can stay in business
Overproduction of heavily subsidized agricultural products (that could be produced more cheaply elsewhere)
Reduces international trade (by 50%; world would be better of by $160 billion)
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5. IMPORT QUOTAS & VOLUNTARY EXPORT RESTRAINTS (VER)
Direct restriction on the quantity of some good that may be imported into the country
by issuing import licenses to a group of firms
VER: quota on trade imposed by the exporting country (at the request of the importing country)
E.g. Japan car producers limited their exports to the US to 1.85 million cars/year ( )
Quota rent (artificially limited supply): $ 1 billion /year  Japanese producers
Because of quotas, US sugar prices were 40%, textile prices were 70 % greater than world prices
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6. LOCAL CONTENT REQUIREMENTS
Requirement that some specific fraction of a good be produced domestically
Physical terms (e.g. 75% of component parts)
Value terms (75% of the value)
e.g. the Buy American Act (1933): requires US government to prefer US-made products in its purchases (51% of materials by value are produced domestically)
Raises the price of imported components
It benefits producers not consumers
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7. ADMINISTRATIVE POLICIES
Bureaucratic rules that make it difficult for imports to enter a country
E.g. Japan has low formal tariff and nontariff barriers, but!  cutting tulip bulbs vertically, opening express packages to check for pornography
Consumers are denied access to possibly superior foreign products
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8. ANTIDUMPING POLICIES
Selling goods at foreign markets at below their cost of production, or below their „fair” market value
Firms try to unload excess production in foreign markets
Predatory behavior  drive indigenous competitors out of the market (then they raise price and earn profit)
Domestic firms can file a petition at the government
The government can impose antidumping duties (countervailing duties) on offending foreign imports
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9. Political arguments for intervention
Protecting jobs and industries (from foreign competition)
E.g. CAP in the EU (restrict imports, guarantee prices)
VER in the US against Japanese and Taiwanese machine tools
National security
Defense-related industries (e.g. aerospace, semiconductors)
Sematech in the US (nonprofit, performs R&D to advance chip manufacturing)
Retaliation
To force foreign partners to play by the rules of the game
Punitive tariff is a risky business (e.g. US against China because of copyright infringements)
Protecting consumers (from unsafe products)
Hormone-treated animals and GM food, weapon
EU’s ban on most GM food  genetic pollution
Furthering foreign policy objectives
Persuade „rogue states” to mend their ways, hasten a change of government
E.g. US trade sanctions against Iraq, Iran, Libya, Cuba (to impoverish them)
Helms-Burton Act (USA  Canada, Mexico)
Protecting human rights
Trade policy used as a political weapon
(e.g. embargo on Syria, MFN status to China)
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10. Economic arguments for intervention
Infant industry argument
Alexander Hamilton (1972)
potential comparative advantage of developing countries  well-established industries in developed countries
Government should temporary support new industries
Critics:
It can help the development of inefficient industries (e.g. Brazilian automobile industry)
Given efficient global capital markets, only inefficient firms would require government protection
Strategic trade policy (New trade policy)
First-mover advantage (e.g. Boeing)
Government should support promising firms that are active in newly emerging industries (e.g. R&D grants to Boeing in s; Japan: to LCD monitors in s)
To help domestic industries overcome the barriers created by foreign firms that have already reaped first-mover advantage (e.g. Airbus)
By home market protection and export promotion
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11. Literature
Charles W.L. Hill: International Business: Competing in the Global Marketplace, Irwin/McGraw-Hill; 2007
Marios I. Katsioloudes & Spyros Hadjidakis: International Business - A Global Perspective, Elsevier - BH, 2007
Paul R. Krugman & Maurice Obstfeld: International Economic: Theory and Policy, Pearson,2003
Janet Morrison: The International Business Environment - Diversity and the global economy, PALGRAVE 2002
Robert M. Dunn, Jr., John H. Mutti: International Eonomics, 5th Ed., Routledge, 2000
Novotny, 2011