Transcript (PPT, Unknown)

4-1
The Political Economy of
International Trade
4-2
The Political Economy of International
Trade
Introduction: Many nations are nominally
committed to free trade, they tend to
intervene in international trade to protect
the interest of politically important groups
or promote the interest of key domestic
producers. When government intervene,
they often do so by restricting imports of
goods and services into their nation,
4-3
The Political Economy of International
Trade
while adopting policies that promote
domestic production and exports.
Normally their motives are to protect
domestic producers and jobs from
foreign competition while increasing
the foreign market for products of
domestic producers.
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Instruments of Trade Policy
1. Tariffs - a tariff is a tax levied on imports or
exports that fall into two categories – specific
tariffs are levied as a fixed charge for each unit of
a good imported and ad valorem tariffs are levied
as a percentage/proportion of the value of the
imported good. The impacts of tariffs are
government gains through revenue, domestic
producers gain and consumers lose.
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Instruments of Trade Policy
2. Subsidies – a subsidy is a government
payment to a domestic producer that take
many forms, including cash grants, lowinterest loans, tax breaks, and government
equity participation in domestic firms. By
lowering production costs, subsidies help
domestic producers in two ways such as
competing against foreign imports and
gaining export markets.
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Instruments of Trade Policy
Drawbacks of this subsidy are (a) allow
inefficient farmers to stay in business
(b) encourage countries to produce
products that could be grown more
cheaply elsewhere and imported (c)
encourage countries to overproduce
heavily subsidized products and (d)
reduce international trade.
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Instruments of Trade Policy
3. Import quotas – An import quota is a direct
restriction on the quantity of some good that
may be imported into a country. The
restriction is usually enforced by issuing
import licenses to a group of individuals or
firms.
4. Voluntary export restraints – a voluntary
export restraint is a quota on trade imposed
by the exporting country, typically at the
request of the importing country’s
government. It benefits domestic producers
by limiting import competition.
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Instruments of Trade Policy
5. Local content requirements – a local content
requirement is a requirement that some
specific fraction of a good be produced
domestically. The requirement can be
expressed either in physical terms or in value
terms. It provides protection for a domestic
producer of parts in the same way an import
quota does, by limiting foreign competition.
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Instruments of Trade Policy
6. Administrative policies – administrative trade
policies are bureaucratic rules designed to make it
difficult for imports to enter a country.
7. Antidumping policies – dumping is variously defined
as selling goods in a foreign market at below their
costs of production or as selling goods in a foreign
market at below their fair market value. It is viewed
as a method by which firms unload excess
production in foreign markets. Antidumping policies
are designed to punish foreign firms that engage in
dumping. The ultimate objective is to protect
domestic producers from unfair foreign competition.
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The case for the government intervention
Government of a country can intervene in
international trade of that country for the best
interest of the common people and specially
for the domestic producers. Government
intervention is supported from two different
viewpoints such as political arguments are
concerned with protecting the interest of
certain groups within a nation and economic
arguments are typically concerned with
boosting the overall wealth of a nation.
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The case for the government intervention
1.
2.
3.
4.
5.
6.
7.
8.
Protecting jobs and industries
National security
Retaliation (revenge)
Protecting consumers
Furthering foreign policy objectives
Protecting human rights
The infant industry argument
Strategic trade policy.
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Free Trade and Protection Trade
1. Free trade – free trade is a system of commercial
policy where there is no distinction between
domestic and foreign commodities and where none
is favored or none is disfavored. It refers complete
absence of tariff, quota, exchange restriction, tax,
production subsidy, utilization of factors of
production and consumption. Actually it is the
external trade system of liberalism that opposes any
of intervention where the state is with the free play
of economic forces.
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Free Trade and Protection Trade
Arguments for free trade:
a) Maximization of social output
b) International specialization
c) Proper utilization of natural resources
d) Opportunity to export surplus goods
e) Increase income of factors of production
f) Protection of monopoly business
g) Ensure competitive price in world market.
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Free Trade and Protection Trade
Arguments against free trade:
a)
Dependency on foreign countries
b) International confliction
c)
Practice of dumping
d) Imbalanced economic growth
e)
Threat to infant industry
f)
Threat to national security
g) Threat to domestic producers
h) Violation of human rights
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Free Trade and Protection Trade
2. Protection trade – it refers to those policies that create
a divergence between the relative prices of
commodities to domestic consumers and their
relative prices in the world market. When the
government of a particular country imposes
different types of restrictions such as issuance of
import license, import and export duties, tax on
specified items and fixation of quantity of import
for controlling purpose in order to safeguard
domestic products then this is called protection
trade.
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Free Trade and Protection Trade
Arguments for protection trade:
a)
Protection of infant industries
b) Protection of sick industries
c)
Expansion of home/domestic market
d) Ensuring favorable position on balance of payment
e)
Domestic employment creation
f)
Diversification of industries
g) Attainment of self sufficiency
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Free Trade and Protection Trade
Arguments against protection trade:
a) Monopolistic exploitation
b) Barriers for consumers’ freedom
c) Inequalities in income distribution of the
world
d) Underutilization of resources
e) Decrease world production and consumption
f) No specialization in production
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Free Trade vs Protection Trade
a)
b)
c)
d)
e)
f)
g)
h)
i)
International specialization
World’s production and consumption
Benefits to consumers and sellers
Monopolistic competition
Utilization of resources
Consumption of non-produced products
Dependency on other countries
Volume of import and export
Terms of trade and balance of payment position.
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Reasons for Free Trade
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Increased Competition
Stabilized Commodity prices
Mobility of labor resources
Mobility of capital resources
Decreases in the total price of goods (taking away taxes or
tariffs)
Transportation costs would be the only major cost of trading
Protect against countervailing or manipulative taxes
Helps against export subsidies and industrial policies of other
nations
Helps prevent shortages or surplus of economic goods
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Reasons for Free Trade
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& Forecasting demand and market conditions would
be easier
Helps Reduce Poverty
Helps disseminates democratic values
Increasing commerce makes wars less likely
Free trade encourages and brings about allies in the
world
Free trade enriches cultures
Generates economic growth
Promotes innovation and competition