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Strategic Trade Policies
(course 13)
Pos M. Hutabarat, PhD
Jakarta, 20 April 2010
Economic Department
University of Indonesia
Trade and Economy
Trade
Exports
Foreign
Exchange
Imports
Economy
Technology
Production
capacity
Fix
capital
Industry
Pos M. Hutabarat PhD
Machinery
Composition of GDP
Agriculture
GDP
Industry
Services
Pos M. Hutabarat PhD
Industrialization Process
Export promotion
High growth
Industrialization
Trade policies
Import substitution
Pos M. Hutabarat PhD
Trade and Industrialization
Export Promotion model:
Develop industrial sector through export
oriented industry with example of Korea,
Taiwan, RRC, Malaysia and Thailand (instrument
: duty draw back, tax incentives, subsidies,
devaluation of currency, etc)
Import Substitution model:
Develop industrial sector by supporting import
substitution domestic industries with example of
Latin America (instrument: high tariff, quota, nontariff, etc)
Pos M. Hutabarat PhD
TRADE POLICIES
Tariff (percentage increase on import price)
Nominal tariff
Effective tariff
Non-Tariff
Quota (limitation of import quantity)
Standards
Custom procedures
Dumping/Subsidy
Non-economy (environment, labor and human rights,
IPR, etc)
Pos M. Hutabarat PhD
Value Added Creation
(from agriculture to industry)
Mill
Promosi,
restaurant
dryer
Coffee bean
Roasted
Powder
US$ 600/ton
US$ 1200/ton
US$ 2500/ton
Pos M. Hutabarat PhD
Starbuck
US$ 2,5/gelas
Value Added Creation
(from agriculture to industry)
Mixed
spicy
Mill and
pengemasan
dryer
kacang polong
Rp 6000/kg
kacang kering
Kacang pedas
Rp 22000/kg
Rp 36000/kg
Pos M. Hutabarat PhD
Peanut butter
Rp 52000/kg
Value Added Creation
(from mining to industry)
teknologi
proses
teknologi
produk
transportasi
Biji besi
Biji besi
Baja lembaran
US$ 20/ton
US$ 50/ton
US$ 700/ton
Pos M. Hutabarat PhD
Mesin diesel
US$ 5400/ton
Trade Policies
1. Developing Countries (developing
vs developed countries, agreement
on primary commodities)
2. Developed Countries
policies, industry vs industry)
Pos M. Hutabarat PhD
(strategic trade
Strategic Trade Policies
Trade policies to develop specific industrial
sector in world oligopoly market to increase
social welfare of a country
Government impose protection (by high
tariff rates) or subsidize domestic industry
to increase its competitiveness versus
competitors in domestic and world markets
Pos M. Hutabarat PhD
Strategic Trade Policies
James Brander dan Barbara Spencer (1995) are the
first scholars to develop idea of Strategic Trade Policies by using
cases of Boeing and Airbus in the form of Game Theory model.
Competition rivalry between Boeing and Airbus to become an example
of oligopoly competition in many study of business school in the last
20 year.
This idea start from Japanese success to develop steel industry
(1950’s); semiconductor (1970’s); and Europe for Concorde and
Airbus (1970’s).
Indonesia developed aircraft industry IPTN (now DI) but failed.
Malaysia also tried auto industry Proton (almost fail)
Pos M. Hutabarat PhD
Game Theory
One of important model to analyze modern business
competition.
When we assume there are only exist 2 companies,
therefore profits (or lost) of one company are depend on
other company’s decision, though both companies have
no information about other competitor’s decision. But
both companies understand that the consequences of
each competitor’s decision, based on its own decision
Pos M. Hutabarat PhD
Prisoners Dilemma Case
`A B
Confessed
Confessed
3
0
5
5
0
1
1
Badu
Not
Ali
Confessed
Not
3
Badu
Not
Pos M. Hutabarat PhD
Boeing vs Airbus
Pos M. Hutabarat PhD
Competition and Strategic
Trade Policy
B
discount
discount
-20
A
-20
Airbus
don’t
50
0
0
50
20
20
Boeing
discount
Don’t discount
Airbus
Don’t
Export airplane
to the world
Pos M. Hutabarat PhD
Competition and Strategic
Trade Policy
M
Discount
Discount
-2.0
I
-2.0
Indonesia
Don’t
5.0
10
10
5.0
Malaysia
Discount
Don’t discount
Indonesia
Don’t
Export CPO to
the world
Pos M. Hutabarat PhD
0
0
Free Trade and Strategic
Trade Policy
Free Trade
Free Trade
A
B
100
100
50
150
150
50
75
75
country B
Protection
country A
Free Trade
Protection
country B
Protection
Pos M. Hutabarat PhD
Japan Strategic Trade Policy
1970 : worlds semiconductor industry were
dominated by USA
1975 : Japan (through MITI) developed semiconductor
industry by granting some facilities to domestic
industries such as:
1. Imposing high tariff rates
2. Tax incentives for investment on semiconductor industries
3. R&D financing
1985: Japan become leading in world semiconductor
production
Pos M. Hutabarat PhD
US Strategic Trade Policy
1910-1970 : There are >100 producer of motorcycles in USA
1978 : Harley Davidson the only one producers which survive,
others went bankruptcy because they could not compete with
imports.
1983 : Government imposed high tariff rates for motorcycles
1984 : Market share of imports declined from 60-70% to 31%.
1987-1991 : Exports of motorcycles from USA increased 31%/per
year
1997-2004 : Shares value of Harley Davidson increased from
US$ 35 to US$ 236
Pos M. Hutabarat PhD
Economic Scale and Duopoly Model
(H and F sales to third Country)
X*
F sales
X*2
X*1
A
Reaction function
H and F, slope
negative
C
B
E
F
H
O
X2
X1
Pos M. Hutabarat PhD
X
H sales
Economic Scale and Duopoly Model
(H and F sales to third Country, export subsidy in H)
by subsidy in H, cost
of production
decrease, production
increase, export
increase, reaction
function shift to the
right
X*
F sales
X*E
E
E’
X*E
F
H
O
XE
XE
Pos M. Hutabarat PhD
H’
X
H sales
Economic Scale and Duopoly Model
(H and F sales to third Country, export subsidy in H)
by subsidy in H, cost
of production
decrease, production
increase, export
increase, reaction
function shift to the
right
X*
F sales
E’’
X*E
X*E
E
E’
F
H
O
XE
XE
Pos M. Hutabarat PhD
F’
H’
X
H sales
Strategic Trade Policies (problems)
There are some problems of imposing this
strategy:
1. It is difficult to choose a certain sector
2. When all developed countries imposing STP,
the net effects are not significant
3. When one country success in imposing STP,
probably others will retaliate
Pos M. Hutabarat PhD