International Business Policy Lecture Seven PDF

International Business Policy IBUS 712 Dr. Dalia Abdelwahab Trade Protectionism International Business policy Trade Protectionism While free trade is beneficial, in reality all countries regulate the flow of goods and services across their...

International Business Policy IBUS 712 Dr. Dalia Abdelwahab Trade Protectionism International Business policy Trade Protectionism While free trade is beneficial, in reality all countries regulate the flow of goods and services across their borders.  What is Trade Protectionism? ✔ It is the governmental restrictions & support to influence international trade competitiveness. ✔ Protectionism are policies that: ❑ affect the ability of foreign producers to compete in your home market ❑ limit or enhance your company’s ability to sell abroad  Why Governments Intervene in Trade? Economic Rationales for Intervention ❑ Fighting unemployment ❑ Protecting infant industries ❑ Promoting industrialization ❑ Improving comparative position Noneconomic Rationales for Intervention ❑ Maintaining essential industries ❑ Promoting acceptable practices abroad ❑ Maintaining or extending spheres of influence ❑ Preserving national culture 7-5  Why Governments Intervene in Trade? Economic Rationales for Intervention Fighting unemployment ❑ Fighting unemployment Unemployed people are one of the most ❑ Protecting infant industries effective pressure groups for restrictions ❑ Promoting industrialization on imports. ❑ Improving comparative position But, trying to fix employment problems Noneconomic Rationales for Intervention using trade policy can create new ❑ Maintaining essential industries challenges: ❑ Promoting acceptable practices abroad higher prices ❑ Maintaining or extending spheres of influence retaliation by other countries decrease export because of price ❑ Preserving national culture increases for components 7-6  Why Governments Intervene in Trade? Economic Rationales for Intervention Protecting infant industries ❑ Fighting unemployment ⮚ Government protection of foreign ❑ Protecting infant industries competition is necessary to help certain ❑ Promoting industrialization industries evolve from high-cost to low- ❑ Improving comparative position cost production. Noneconomic Rationales for Intervention ❖ Production becomes more competitive ❑ Maintaining essential industries over time because of increased ❑ Promoting acceptable practices abroad economies of scale and greater work ❑ Maintaining or extending spheres of influence efficiency. ❑ Preserving national culture ⮚ Used by developing countries 7-7  Why Governments Intervene in Trade? Economic Rationales for Intervention ❑ Fighting unemployment Promoting industrialization Generally, countries with higher per capita ❑ Protecting infant industries GDP have larger manufacturing bases. That’s why countries trying to develop an ❑ Promoting industrialization industrial base intervene in trade flows. (USA restricted imports to grow manufacturing base) ❑ Improving comparative position Why countries promote industrialization? Noneconomic Rationales for Intervention - bring faster growth than agriculture ❑ Maintaining essential industries - bring in investment funds ❑ Promoting acceptable practices abroad - diversify the economy - bring more income than primary ❑ Maintaining or extending spheres of influence products do ❑ Preserving national culture - reduce imports and promote exports 7-8  Why Governments Intervene in Trade? Economic Rationales for Intervention ❑ Fighting unemployment Improving comparative position Countries can use trade controls to ❑ Protecting infant industries improve their relationships with other ❑ Promoting industrialization countries ❑ Improving comparative position Why? - to improve the balance of payments Noneconomic Rationales for Intervention ❑ Maintaining essential industries - to gain fair access to foreign markets ❑ Promoting acceptable practices abroad - as a bargaining tool ❑ Maintaining or extending spheres of influence ❑ Preserving national culture - to control prices 7-9  Why Governments Intervene in Trade? Economic Rationales for Intervention Maintaining essential industries ❑ Fighting unemployment ❑ Protecting infant industries ❑ Protect essential industries so the country is not dependent on ❑ Promoting industrialization foreign supplies during war. ❑ Improving comparative position ❑ Countries must: ✔ determine which industries are Noneconomic Rationales for Intervention essential ❑ Maintaining essential industries ✔ consider costs and alternatives ✔ consider political consequences ❑ Promoting acceptable practices abroad ❑ Maintaining or extending spheres of influence ❑ Preserving national culture 7-10  Why Governments Intervene in Trade? Economic Rationales for Intervention Promoting acceptable practices abroad ❑ Fighting unemployment Governments can use trade policy to encourage or discourage certain types of ❑ Protecting infant industries behavior by other countries. ❑ Promoting industrialization Import trade controls can be used to: ❑ Improving comparative position ✔ promote changes in foreign countries’ political policies. Noneconomic Rationales for Intervention ✔ as a foreign policy weapon (e.g. embargo ❑ Maintaining essential industries of Cuban produce, gas from Russia) ❑ Promoting acceptable practices abroad ✔ pressure governments to change their stances on a variety of issues ❑ Maintaining or extending spheres of influence ▪ human rights ▪ environmental protection ❑ Preserving national culture ▪ foreign policy 7-11  Why Governments Intervene in Trade? Economic Rationales for Intervention Maintaining or extending spheres of ❑ Fighting unemployment influence Trade restrictions can also be used to support ❑ Protecting infant industries a country’s sphere of influence. ❑ Promoting industrialization Governments encourage imports from countries that join a political alliance or vote a ❑ Improving comparative position preferred way within international bodies Example: In July 1993, the EU implemented a Noneconomic Rationales for Intervention single EU-wide regime on banana imports. The regime gave preferential entry to bananas ❑ Maintaining essential industries from the EU's overseas territories and former colonies and restricted entry from other ❑ Promoting acceptable practices abroad countries, including several in Latin America ❑ Maintaining or extending spheres of influence where U.S. companies predominate ❑ Preserving national culture 7-12  Why Governments Intervene in Trade? Economic Rationales for Intervention Preserving National Culture ❑ Fighting unemployment Sustaining the collective identity that sets their citizens apart from those in other ❑ Protecting infant industries nations. ❑ Promoting industrialization To preserve national culture, countries: ❑ Improving comparative position ✔ limit foreign products and services in certain sectors. ✔ prohibit exports of art and historical items Noneconomic Rationales for Intervention deemed important to national heritage ❑ Maintaining essential industries For example: Rice imports were strictly ❑ Promoting acceptable practices abroad limited for years in Japan, because rice farming was considered to be a historically ❑ Maintaining or extending spheres of influence cohesive force in the country. ❑ Preserving national culture 7-13  Instruments of Trade Control What are the major means by which trade is restricted and regulated? 7-15  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Import Transit Export Direct Price Influences Quantity Control Tariffs Tariffs Tariffs Quotas Subsidies Buy local Legislation Aids and Loans Standards & Labels Customs Valuation Specific Permission Other Requirement Administrative Delays Reciprocal Requirements  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Two types of trade controls ❑ Tariffs (duties): directly limit the amount of a good that can be traded. ❑ Non-tariff barriers: indirectly affect the amount traded.  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Import Transit Export Tariffs Tariffs Tariffs ✔ Tariffs refers to a government tax on goods shipped internationally. ✔ Tariffs may be imposed on goods entering, leaving, or passing through a country  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Direct Price Influences Quantity Control ✔ Non-tariff barriers can take different forms including: ▪ Direct price influences: Subsidies, aids and loans, other direct price influences ▪ Quantity controls: Quotas, buy local legislation, standards and labels, specific permission requirements, admin delays, restrictions on services  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Import Transit Export Direct Price Influences Quantity Control Tariffs Tariffs Tariffs Subsidies Aids and Loans Customs Valuation Other Subsidies ▪ direct assistance to companies to make them more competitive ▪ overcoming market imperfections ▪ Ex. agricultural subsidies Aid and loans (usually to developing countries) Customs Valuation Other direct-price influences: special fees and requirements  Instruments of Trade Control Tariffs Nontariff Barriers Barrier Import Transit Export Direct Price Influences Quantity Control Tariffs Tariffs Tariffs Quotas “Buy local” Legislation Standards & Labels Specific Permission Requirement Administrative Quotas Delays ▪ limit the quantity of a product that can be imported or Reciprocal exported in a given time frame Requirements ▪ Embargoes (complete prohibition of trade or trade of certain products). Example US embargo on Cuba Specific permission requirements ▪ import or export license US - China Trade war What can local firms do that face import competition through trade? Companies facing import competition can: ❑ Move abroad ❑ Seek other market niches ❑ Make domestic output competitive ❑ Try to get protection 7-23