IBUS 712: Trade Protectionism Overview

International Business Policy (IBUS 712) - Trade Protectionism

• Trade protectionism is the use of government restrictions and support to influence international trade competitiveness.
• Protectionism policies affect the ability of foreign producers to compete in a domestic market, and can limit or enhance a company's ability to sell abroad.

Reasons for Government Intervention in Trade

Economic Rationales

• Fighting unemployment: Unemployed people often strongly advocate for trade restrictions on imports.
• Protecting infant industries: Governments may shield nascent industries from competition as they mature, allowing them to become price-competitive. High start-up costs make this protection necessary.
• Promoting industrialization: Countries with rapidly developing manufacturing sectors often use trade restrictions as part of their development strategy. Increasing manufacturing tends to drive GDP.
• Improving comparative position: Nations can employ trade policies to improve their comparative advantage and relationships with other countries. This can involve actions to influence the balance of payments, access to foreign markets, and acting as a bargaining tool.

Noneconomic Rationales

• Maintaining essential industries: Maintaining industries that are critical during times of war or economic crisis is essential to national security and infrastructure.
• Promoting acceptable practices abroad: Governments use trade policy to encourage desirable practices, like human rights standards and environmental protection. This can also be achieved through embargoes or sanctions.
• Maintaining or extending spheres of influence: Trade can be used to support geopolitical influence, to encourage imports from friendly countries, or to discourage imports from opponents.
• Preserving national culture: Governments limit foreign products and services in certain sectors, often to protect their cultural heritage and national pride. This can be done with policies like restrictions on imports of certain goods, or even prohibitions on exporting culturally-significant items.

Instruments of Trade Control

• Two types of controls:
  • Tariffs (duties): Directly limit the amount of a good that may be traded by imposing a tax. This is imposed on goods entering, leaving, or passing through a country.
  • Non-tariff barriers: Indirectly affect the amount of trade by other methods.
• Non-tariff methods:
  • Direct Price Influences: Subsidies, aids, loans, customs valuations.
  • Quantity Controls: Quotas, buy-local legislation, standards, labels, specific permission requirements, administrative delays, reciprocal requirements, and embargoes.
• Subsidies: Direct assistance to domestic firms to increase their competitiveness, offsetting market imperfections. Aids are common forms of support, such as agricultural subsidies.

US - China Trade War

The text mentions a trade war between the US and China without providing specific details.

Strategies for Firms Facing Import Competition

• Move abroad: Companies can escape the intense competition by producing products in a different country.
• Seek other market niches: Focus on unique products catering to specific market segments to minimize direct competition.
• Make domestic output competitive: Companies can increase efficiency and lower costs to become more price-competitive with imports.
• Try to get protection: Companies may lobby the government for trade restrictions to minimize the competitive effect of imports.