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c hapter 9. formulation of national trade policies. Chapter Objectives 1. Present the major arguments in favor of and against governmental intervention in international trade Identify the advantages and disadvantages of adopting an industrial policy

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C hapter 9 l.jpg

chapter 9

formulation of national trade policies


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Chapter Objectives 1

  • Present the major arguments in favor of and against governmental intervention in international trade

  • Identify the advantages and disadvantages of adopting an industrial policy

  • Analyze the role of domestic politics in formulating a country’s international trade policies

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Chapter Objectives 2

  • Describe the major tools countries use to restrict trade

  • Specify the techniques countries use to promote international trade

  • Explain how countries protect themselves against unfair trade practices

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Issues on Trade Intervention

  • Should a national government intervene to protect the country’s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?

  • Should a national government directly help the country’s domestic firms increase their foreign sales through export subsidies, government-to-government negotiations, and guaranteed loan programs?

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Free Trade or Fair Trade?

Free Trade

Fair Trade

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Industry-Level Arguments

National Defense

Infant Industry

Maintenance of Existing Jobs

Strategic Trade

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National Defense Argument

  • Country must be self-sufficient in critical raw materials, machinery, and technology or else be vulnerable to foreign threats.

  • Appeals to general public

  • Protects steel, electronics, and machine tools industries, and merchant marines

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Infant Industry Argument

  • Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established

  • Powerful economic development strategy

  • Which industries should be protected? For how long?

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Maintenance of Existing Jobs

  • Jobs in high-wage countries threatened by imports from low-wage countries

  • Forms of assistance

    • Tariffs

    • Quotas

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Strategic Trade Theory

Strategic trade theory suggests that a national government can make its country better off if it adopts trade policies that improve the competitiveness of its domestic firms in such oligopolistic industries.

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National Trade Policies

Economic Development Programs

Industrial Policy

Public Choice Analysis

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Economic Development Programs

Export

Promotion

Strategy

Import

Substitution

Strategy

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Industrial Policy

When industrial policy is pursued, the national government identifies key domestic industries critical to the country’s future economic growth and then formulates programs that promote their competitiveness.

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Public Choice Analysis

Special interest groups are willing to work harder for the passage of laws favorable to their interests than the general public is willing to work for the defeat of laws unfavorable to its interests.

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Reasons for Tariffs

  • Tariffs raise revenues for national governments

  • Tariffs act as a barrier to trade

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Tariff Barriers to International Trade

Export

tariffs

Ad valorem

Import

tariffs

Specific

Compound

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Quotas U.S.–Made Minivans

Numerical export controls

Product and testing standards

Restricted access to distribution networks

Public-sector procurement policies

Regulatory controls

Currency controls

Investment controls

Local-purchase requirements

Nontariff Barriers

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Figure 9.4 Tariff Rate Quota on Widgets U.S.–Made Minivans

A tariff rate quota imposes high tariff rates on imports above the threshold level.

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These Indian sugar cane workers receive less for their crops because of the tariff-rate quota imposed by the U.S.

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Product and testing standards because of the tariff-rate quota imposed by the U.S.

Restricted access to distribution networks

Public-sector procurement policies

Local-purchase requirements

Regulatory controls

Currency controls

Investment controls

Forms of Nonquantitative NTBs

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Figure 9.5 Types of Barriers to because of the tariff-rate quota imposed by the U.S.International Trade

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Promotion of International Trade because of the tariff-rate quota imposed by the U.S.

Subsidies

Foreign Trade Zones

Export Financing Programs

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Map 9.2 Foreign Trade Zone because of the tariff-rate quota imposed by the U.S.on Mauritius

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Controlling because of the tariff-rate quota imposed by the U.S.Unfair Trade Practices

  • International Trade Administration (ITA)

    • Division of U.S. Department of Commerce

    • Determines whether an unfair trade practice has occurred

    • Confirmed cases transferred to U.S. International Trade Commission (ITC)

  • Two types of unfair trade practices

    • Government subsidies

    • Unfair pricing practices

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Controlling Unfair Trade Practices because of the tariff-rate quota imposed by the U.S.

Countervailing

Duties

Antidumping

Regulations

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Objectives of because of the tariff-rate quota imposed by the U.S.Unfair Trade Practice Laws

  • Promote global efficiency by encouraging production in those countries that can produce a good most efficiently

  • Ensure that trade occurs on the basis of comparative advantage, not the size of government subsidies

  • Protect consumers from predatory behavior

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