The Political Economy of International Trade

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 3

Chapter 6 2.

Subsidies - government payments to domestic


producers
The Political Economy of International Trade
– Subsidies help domestic producers
Introduction
 compete against low-cost
• Free trade occurs when governments do not foreign imports
attempt to restrict what citizens can buy from
another country or what they can sell to  gain export markets
another country
– Consumers typically absorb the costs
• While many nations are nominally committed of subsidies
to free trade, they tend to intervene in
international trade to protect the interests of 3. Import Quotas - restrict the quantity of some
politically important groups good that may be imported into a country

– Tariff rate quotas - a hybrid of a


quota and a tariff where a lower tariff
Instruments of Trade Policy is applied to imports within the quota
than to those over the quota
Question: How do governments intervene in
international trade? – A quota rent - the extra profit that
producers make when supply is
Answer: artificially limited by an import quota
• There are seven main instruments of trade 4. Voluntary Export Restraints - quotas on
policy trade imposed by the exporting country,
typically at the request of the importing
1. Tariffs country’s government
2. Subsidies
3. Import quotas – Import quotas and voluntary export
4. Voluntary export restraints restraints
5. Local content requirements
6. Antidumping policies  benefit domestic producers
7. Administrative policies
 raise the prices of imported
goods
How Do Governments Intervene In Markets?
5. Local Content Requirements - demand that
• Governments use various methods to intervene
some specific fraction of a good be produced
in markets including
domestically
1. Tariffs - taxes levied on imports that
• can be in physical terms or in
effectively raise the cost of imported products
value terms
relative to domestic products
• Local content requirement:
– Specific tariffs - levied as a fixed
charge for each unit of a good  benefit domestic producers
imported
 consumers face higher prices
– Ad valorem tariffs - levied as a
proportion of the value of the 6. Administrative Polices - bureaucratic rules
imported good designed to make it difficult for imports to
enter a country
– Tariffs
– polices hurt consumers by limiting
 increase government revenues choice
 force consumers to pay more
for certain imports
 are pro-producer and anti-
consumer
 reduce the overall efficiency
of the world economy
7. Antidumping Policies – aka countervailing What Are The Political Arguments For
duties - designed to punish foreign firms that Government Intervention?
engage in dumping and protect domestic
producers from “unfair” foreign competition 1. Protecting jobs - the most common political
reason for trade restrictions
– dumping - selling goods in a foreign
market below their costs of production, – results from political pressures by
or selling goods in a foreign market unions or industries that are
below their “fair” market value "threatened" by more efficient foreign
producers, and have more political
 enables firms to unload excess clout than consumers
production in foreign markets
2. Protecting industries deemed important for
 may be predatory behavior - national security - industries like aerospace
producers use profits from or electronics are often protected because they
their home markets to are deemed important for national security
subsidize prices in a foreign
market to drive competitors 3. Retaliating to unfair foreign competition -
out of that market, and later when governments take, or threaten to take,
raise prices specific actions, other countries may remove
trade barriers
Why Do Governments Intervene In Markets?
– if threatened governments do not back
• There are two main arguments for government down, tensions can escalate and new
intervention in the market trade barriers may be enacted

1. Political arguments - concerned with 4. Protecting consumers from “dangerous”


protecting the interests of certain groups products – limit “unsafe” products
within a nation (normally producers), often at
the expense of other groups (normally 5. Furthering the goals of foreign policy -
consumers) preferential trade terms can be granted to
countries that a government wants to build
2. Economic arguments - concerned with strong relations with
boosting the overall wealth of a nation –
benefits both producers and consumers – trade policy can also be used to punish
rogue states

– the Helms-Burton Act and the


D’Amato Act, have been passed to
protect American companies from
such actions

6. Protecting the human rights of individuals


in exporting countries – through trade policy
actions

– the decision to grant China MFN


status in 1999 was based on this
philosophy
What Are The Economic Arguments For How Has The Current World Trading System
Government Intervention? Emerged?

1. The infant industry argument - an industry • Until the Great Depression of the 1930s, most
should be protected until it can develop and be countries had some degree of protectionism
viable and competitive internationally
 Smoot-Hawley tariff (1930)
 accepted as a justification for
temporary trade restrictions under the • After WWII, the U.S. and other nations
WTO realized the value of freer trade

Question: When is an industry “grown up” ?  established the General Agreement


on Tariffs and Trade (GATT) - a
• Critics argue that if a country has the potential multilateral agreement to liberalize
to develop a viable competitive position its trade
firms should be capable of raising necessary
funds without additional support from the • In the 1980s and early 1990s protectionist
government trends emerged

2. Strategic trade policy - in cases where there  Japan’s perceived protectionist (neo-
may be important first mover advantages, mercantilist) policies created intense
governments can help firms from their political pressures in other countries
countries attain these advantages
 persistent trade deficits by the U.S
– governments can help firms overcome
barriers to entry into industries where  use of non-tariff barriers increased
foreign firms have an initial advantage • The Uruguay Round of GATT negotiations
began in 1986 focusing on

When Should Governments Avoid Using Trade  Services and intellectual property
Barriers? - going beyond manufactured goods to address
• Paul Krugman argues that strategic trade trade issues related to services and intellectual
policies aimed at establishing domestic firms property, and agriculture
in a dominant position in a global industry are -
beggar-thy-neighbor policies that boost  The World Trade Organization
national income at the expense of other
countries - It was hoped that enforcement mechanisms
would make the WTO a more effective
 countries that attempt to use such policeman of the global trade rules
policies will probably provoke
retaliation • The WTO encompassed GATT along with two
sisters organizations
• Krugman argues that since special interest
groups can influence governments, strategic  the General Agreement on Trade in
trade policy is almost certain to be captured by Services (GATS)
such groups who will distort it to their own
ends  the Agreement on Trade Related
Aspects of Intellectual Property Rights
(TRIPS)

• The WTO has emerged as an effective


advocate and facilitator of future trade deals,
particularly in such areas as services

• So far, the WTO’s policing and enforcement


mechanisms are having a positive effect

• Most countries have adopted WTO


recommendations for trade disputes

You might also like