BS Chapter 08
Transcript of BS Chapter 08
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 1
All Rights Reserved
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 2
All Rights Reserved
PART III
Countries and TradePolicies
8
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 3
All Rights Reserved
LEARNING OBJECTIVES
To understand the motives for government intervention in trade
To explain the instruments of trade policies and how governments can implement them
To understand how the instruments of trade policies will affect countries and international firms
To discuss the case for government intervention in trade policies
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 4
All Rights Reserved
8.1 INTRODUCTION
In today’s global economy, firms must deal with both domestic and foreign competitors
Due to competition, local firms may request protection or special privileges from the government
Exports generate domestic jobs, so unsurprisingly many national governments encourage the success of their countries’ domestic firms in international markets
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 5
All Rights Reserved
8.1 INTRODUCTION (cont.)
A national government may develop trade policies that begin considering the needs of the economy and society as a whole
After assessing these needs, the government then adopts industry-by-industry policies to promote the country’s overall economic agenda
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 6
All Rights Reserved
8.2 GOVERNMENT INTERVENTIONIN TRADE
Governments normally intervene in a nation’s international trade for reasons such as political, economic, and socio-cultural factors
Figure 8.1 Reasons for Government Intervention in Trade
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 7
All Rights Reserved
8.2.1 Political Factors – Protecting Consumers
Tariffs have long been used as a political tool to establish a nation’s independence
The 1789 United States Tariff Act is an early act designed to achieve political and economic goals in international trade
Recently, tariffs have resulted in many political impacts, both positive and negative
Tariffs are usually politicized during elections, particularly in the US and Australia
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 8
All Rights Reserved
8.2.1 Political Factors – Protecting Consumers (cont.)
While developing nations want more government intervention in international trade to protect their infant industries, developed nations may intervene to protect their consumers
Government intervention in agricultural products, for example, may be necessary as a protective measure to ensure a stable supply of food for local consumers
The main purpose of health, safety, and sanitation regulations is to protect domestic agriculture and consumers from foreign pests, diseases, or chemical residues
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 9
All Rights Reserved
8.2.1 Political Factors – Protecting Consumers (cont.)
Government intervention in international trade lead to the establishment of international organizations regulating international trade, such as the World Trade Organization
The United Nations has also set up councils to monitor activities related to international trade, such as UNCTAD to regulate trade and its development
The World Bank and International Monetary Fund are also international organizations developed due to government intervention in international trade
Government intervention has also contributed to the existence of trading blocs based on locations
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 10
All Rights Reserved
8.2.2 Economic Factors
Economic factors prompting government intervention in international trade include protecting jobs and infant industries, implementing strategic trade policies, or securing national economic security
i) Protecting Jobs Well-established firms (in high-wage countries), are
often threatened by imports from low-wage countries To maintain existing employment levels, firms and
workers often try to lobby their governments for assistance from foreign competition
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 11
All Rights Reserved
8.2.2 Economic Factors (cont.)
Assistance may come in many forms, such as tariffs, quotas, or other trade barriers
Perhaps the most recent development of lobbying for government intervention to protect jobs is the Confederation of All-India Traders (CAIT) request to the Indian government for a National Trade Policy to be drafted especially for their retail and small enterprises
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 12
All Rights Reserved
8.2.2 Economic Factors (cont.)
ii) Protecting Infant Industries In the economic view, government intervention in
international trade protects local infant industries By implementing protectionism measures, newly
founded industries will have the support to grow and develop to stay competitive in the international economy
The measures also enable the industries to become self-sufficient
In a free market economic system, measures such as tariffs must be completely eradicated
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 13
All Rights Reserved
8.2.2 Economic Factors (cont.)
As proposed by economist Ludwig Von Mises, a free market is defined by four requirements: private property, a persuasive government, the dearth of institutional meddling within the system, and the division of labour
Although there is some truth in the infant-industry argument, it must be qualified in several respects: Once a protective tariff is put in place, it is very difficult to
remove, even after the infant industry has reached its maturity level
It is very hard to find out which industries will have the required capabilities of accomplishing comparative advantage potential, and thus merit protection
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 14
All Rights Reserved
8.2.2 Economic Factors (cont.)
This argument is not applicable for developed or industrialized nations like the US, Canada, Japan, and Germany
Apart from using trade barriers like tariffs, a developing industry can be protected from intense competition via other means
In providing protection to infant industries, government intervention allows for young industries to be competitive in international trade
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 15
All Rights Reserved
8.2.2 Economic Factors
iii) Strategic Trade Policies Gained importance in international trade since the
1980s This policy proposes that the government may
provide required aid to local firms to confine economic profits from foreign competitors
Such assistance entails government support for certain ‘strategic’ industries (such as high-technology industries) that are important to future domestic economic growth and that provide widespread benefits (externalities) to society (Carbaugh, 2004)
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 16
All Rights Reserved
8.2.2 Economic Factors (cont.)
iv) National Economic Security A country’s security may be jeopardized in the
event of an international crisis or war if it is heavily dependant on foreign suppliers To ensure the subsistence of local producers,
tariff protections and other protectionism measures must be implemented even though domestic producers are not as efficient
However, critical industries are always specified by the conditions and the existing problems often indicate the critical industry
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 17
All Rights Reserved
8.2.2 Economic Factors (cont.)
If the term is defined broadly, many industries may be able to win import protection, and the argument loses its meaning
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 18
All Rights Reserved
8.2.3 Cultural Factors
International trade may have a significant impact on national culture
For example, in Canada, many nationalists maintain that Canadian culture is too fragile to survive without government protection The big threat is US cultural imperialism Thus, Canada has long maintained some
restrictions on sales of US publications and textbooks
By the 1990s, the envelope of Canada’s cultural protectionism had greatly expanded
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 19
All Rights Reserved
8.2.3 Cultural Factors (cont.)
The most blatant example was a 1994 law that levied an 80% tax on American advertisements in Canadian editions of US magazines, in an effort to discourage the intrusion of US culture
Without protection for Canadian media, cultural nationalists feared that US magazines such as Sports Illustrated, Times and Business Week would deprive Canadians of the ability to read about themselves in Maclean’s and Canadian Business
Although the tax was eventually abolished due to US protests, the Canadian government continues to examine other methods of preserving its culture
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 20
All Rights Reserved
8.3 INSTRUMENTS OF TRADE POLICY
Nations can impose restrictions that are considered essential for the benefit of the nation
This freedom is known as national sovereignty National sovereignty enables the government of
a country to establish certain policies regarding its international trade
Trade policies refer to the planning or procedures set up by a government that determine what and how international trading can be conducted
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 21
All Rights Reserved
8.3 INSTRUMENTS OF TRADE POLICY (cont.)
Trade policies imposed by countries can be considered as trade barriers, as this is against the WTO liberalization of trade policy
These trade policies create obstacles and make it hard for other countries to trade with that particular country. Hence, trade policies can impede the growth of international trade among nations
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 22
All Rights Reserved
8.3 INSTRUMENTS OF TRADE POLICY (cont.)
Trade policies are also sometimes referred to as trade barriers, which can generally be classified into tariff and non-tariff barriers
Figure 8.2 Trade Policy Instruments
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 23
All Rights Reserved
8.4 TARIFF BARRIERS
Tariff A tax (duty) enforced on a product when it crosses
national boundaries Import tariff
Tax levied on an imported product The most widespread tariff
Export tariff Tax imposed on an exported product Less common tariff Often used by developing nations
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 24
All Rights Reserved
8.4 TARIFF BARRIERS (cont.)
A tariff is a tax on goods upon importation. When a ship reaches a port, a customs officer inspects the contents and charges tax according to a tariff formula
Since the goods cannot be landed until the tax is paid, it is the easiest tax to collect, and the cost of collection is considered small
Traders seeking to evade tariffs are known as smugglers
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 25
All Rights Reserved
8.4.1 Purpose of Tariffs
i) Protective Tariffs Designed to shield import-competing producers
from foreign competition Generally not intended to totally prohibit imports
from entering a country Place foreign producers at a competitive
disadvantage when selling in the domestic market
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 26
All Rights Reserved
8.4.1 Purpose of Tariffs (cont.)
ii) Revenue Tariffs Imposed for the purpose of generating tax revenues
and may be placed on either exports or imports Over time, tariff revenues have decreased as a
source of government revenue for industrial nations, including the US In 1990, tariff revenues constituted more than 41% of US
government receipts Records at the millennium show the figure to be 1%
However, many developing nations currently rely on tariffs as a major source of government revenue
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 27
All Rights Reserved
8.4.2 Types of Tariffs
Three types of tariffs: specific, ad valorem, and compound tariffs
i) Specific Tariffs Expressed in terms of a fixed amount of money per
physical unit of imported product As a fixed monetary duty per unit of the imported
product, a specific tariff is relatively easy to apply and administer, particularly to standardized commodities and staple products where the value of the dutiable goods cannot be easily observed
A specific tariff has the advantage of providing domestic producers with more protection during a business recession, when cheaper products are purchased
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 28
All Rights Reserved
8.4.2 Types of Tariffs (cont.)
Specific tariffs thus progressively cushion domestic producers against foreign competitors who cut their prices
The main disadvantage of a specific tariff is that the degree of protection it affords domestic producers varies inversely with changes in import prices
During times of rising import prices, a given specific tariff loses some of its protective effect
The higher the price of imported product, the less effective the specific tariff protective function
Thus, domestic firms are encouraged to produce less expensive goods, for which the degree of protection against imports is higher
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 29
All Rights Reserved
8.4.2 Types of Tariffs (cont.)
ii) Ad Valorem Tariffs Expressed as a fixed percentage of the value of
the imported product Ad valorem tariffs usually lend themselves more
satisfactorily to manufactured goods, because they can be applied to products with a wide range of grade variations
As a percentage applied to the value of a product, an ad valorem tariff can be distinguished in small differentials in product quality to the extent that they are reflected in product price
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 30
All Rights Reserved
8.4.2 Types of Tariffs (cont.)
Under a system of specific tariffs, the duty would be the same
An advantage of an ad valorem tariff is that it tends to maintain a constant degree of protection for domestic producers during periods of changing prices
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 31
All Rights Reserved
8.4.2 Types of Tariffs (cont.)
This tariff is similar to a proportional tax in that the real proportional tax burden or protection does not change as the tax base changes
Determination of duties under the ad valorem principle at first appears to be simple, but in practice has suffered from administrative complexities
The main problem is to determine the value of an imported product, a process referred to as customs valuation
Another customs-valuation problem stems from variations among nations in the methods used to determine a commodity’s value
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 32
All Rights Reserved
8.4.2 Types of Tariffs (cont.)
iii) Compound Tariffs Compound duties combine both characteristics of
specific and ad valorem tariffs Often applied to manufactured products
embodying raw materials that are subject to tariffs Thus, the specific portion of the duty neutralizes
the cost disadvantage of domestic manufacturers due to tariff protection granted to domestic suppliers of raw materials, and the ad valorem portion of the duty grants protection to the finished-goods industry
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 33
All Rights Reserved
8.4.3 Tariffs and Exports
A tariff causes additional burdens to exporters and importers In protecting import-competing producers, a tariff
leads indirectly to a reduction in domestic exports The net outcome of protectionism is to move the
economy toward greater self-sufficiency, with lower imports and exports
For domestic workers, the protection of jobs in import-competing industries comes at the expense of jobs in other sectors of the economy, including exports
Although a tariff is intended to help domestic producers, the economy-wide implications of a tariff are undesirable toward the export sector
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 34
All Rights Reserved
8.4.3 Tariffs and Exports (cont.)
Welfare losses due to restrictions in output and employment in the economy’s export industry may offset the welfare gains enjoyed by import-competing producers
Importers are required to pay duties to the domestic government upon entering the domestic market, which is translated as an increase in the cost of import
– They will try to pass the increased costs to buyers or end users through price increases
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 35
All Rights Reserved
8.4.3 Tariffs and Exports (cont.)
There are at least three ways in which the resulting higher prices of imports injure domestic exporters: Exporters often purchase imported inputs, which are
subject to tariffs Tariffs also raise the cost of living by increasing the
price of imports Import tariffs have international consequences that
lead to reductions in domestic exports
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 36
All Rights Reserved
8.4.4 Effect of Tariffs on International Trade
According to some economic theories, tariffs have a harmful effect on individual freedom and free market concepts
These theories believe that tariffs are unfair toward consumers and that it is generally disadvantageous for a country to maintain an inefficient industry
The principle underlying free trade opposes all types of tariffs
The World Trade Organization, WTO, as a regulatory body of international trade and the main platform for free trade, intends to abolish or reduce tariffs among contracting nations involved in international trade
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 37
All Rights Reserved
8.4.4 Effect of Tariffs on International Trade (cont.)
Figure 8.3 The effects of international trade on the economy
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 38
All Rights Reserved
8.4.4 Effect of Tariffs on International Trade (cont.)
Apparently, with or without tariffs, there is no incentive to buy the imported goods over the domestic goods, as the price of each is the same
Only by adjusting available purchasing power through debt, selling off assets, or new wages from new forms of domestic production, will the imported goods be purchased
In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 39
All Rights Reserved
8.4.5 Tariffs and Quotas
Tariffs and quantitative restrictions, commonly known as import quotas, both serve the purpose of controlling the number of foreign products that can enter the domestic market
There are a few reasons why tariffs are a more attractive option compared to import quotasi. Tariffs generate revenue for the governmentii. Import quotas can lead to administrative
corruptioniii. Import quotas are more likely to cause smuggling
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 40
All Rights Reserved
8.4.6 Countervailing Duties
Countervailing duties (CVDs) are used as a means to restrict international trade
They are executed to protect local industries from unfair competition due to subsidization of imports by the exporting side, be it the exporting firms’ government or other agencies
The duty is imposed when the subsidization of the imported product, in one way or another, hurts the local import competing producers
CVD is an ad valorem tariff on an imported good that is imposed by the importing country to counter the impact of foreign subsidies
The purpose of CVDs is merely to counter the advantages enjoyed by the exporters through the subsidized imports entering the market
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 41
All Rights Reserved
8.5 NON-TARIFF BARRIERS (NTBs)
Non-tariff barriers differ from tariff barriers in the sense that it is in the form of restrictions rather than taxes as in tariff barriers
Non-tariff barriers may also hinder international trading activities, as it would add costs to exporting and importing activities
Non-tariff barriers can be in various forms such quotas, subsidies, and local content requirements
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 42
All Rights Reserved
8.5.1 Subsidies
National governments sometimes grant subsidies (also known as a subvention) to local producers to help improve their trade position
By providing domestic firms with a cost advantage, a subsidy allows them to market their products at prices lower than their actual cost or profit considerations
Governmental subsidies assume a variety of forms, including outright cash disbursements, tax concessions, insurance arrangements, and loans at below-market interest rates (Carbaugh, 2004)
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 43
All Rights Reserved
8.5.1 Subsidies (cont.)
Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports
Subsidies may distort markets, and can impose large economic costs
Financial assistance in the form of a subsidy may come from one’s government, but the term subsidy may also refer to backing granted by others, such as individuals or non-governmental institutions, although these would be normally described as charity
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 44
All Rights Reserved
8.5.1 Subsidies (cont.)
i) Types of Subsidies There are many different ways to classify
subsidies based on purpose for the subsidy, the recipients of the subsidy, or the source of funds (government, consumer, general tax revenue, etc.)
In economics, one of the primary ways to classify subsidies is by the means of distributing the subsidy
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 45
All Rights Reserved
8.5.1 Subsidies (cont.)
In economics, a subsidy may nonetheless be characterized as inefficient relative to no subsidy; inefficient relative to other means of producing the same results; ‘second-best’, implying an inefficient but feasible solution (contrasted with an efficient but not feasible ideal), among other possible terminology
In other cases, a subsidy may be an efficient means of correcting a market failure
Subsidies would generally be considered by economists to be bad, as economics is the study of efficient use of limited resources
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 46
All Rights Reserved
8.5.1 Subsidies (cont.)
Ultimately , the choice to impose a subsidy is a political choice
ii) Economic Subsidies Economics has also explicitly identified a number
of areas where subsidies are entirely justified by economics, particularly in the area of provision of public goods Direct subsidy – A direct subsidy is the simplest, and
arguably the least frequently used subsidy. It involves a direct cash transfer to a recipient
Indirect subsidy – The term covers any form of subsidy that does not involve a direct transfer
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 47
All Rights Reserved
8.5.1 Subsidies (cont.)
Labour subsidy – A labour subsidy is any form of subsidy where the recipients receive subsidies to pay for labour costs. Tax deductions imposed on workers in certain industries are also a part of labour subsidy
Tax subsidy – A tax subsidy is any form of subsidy where the recipients receive the benefit through the tax system. The subsidy can be distributed via tax related channels such as income tax, profit tax, consumption tax systems, etc. A tax subsidy may also be exercised through consumption tax exemption (value added tax or sales tax)
Perverse subsidies – The term ‘perverse’ is sometimes applied to a subsidy when it encourages undesirable outcomes, which largely impose social costs upon the rest of the society
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 48
All Rights Reserved
8.5.1 Subsidies (cont.)
Production subsidy – In certain cases, such as to encourage the development of a particular industry, governments may provide direct production subsidies in terms of cash payments for production of a given good or service
Regulatory advantages – A policy can be directly or indirectly in favour of one industry, company, product, or class of producer over other means of regulations
Infrastructure subsidy – An infrastructure subsidy can be classified as a form of indirect production subsidy, whereby the provision of infrastructure using public expenses may effectively be useful for a limited group of potential users
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 49
All Rights Reserved
8.5.1 Subsidies (cont.)
Trade protection (imports) – Measures used to limit imports from other countries may constitute another form of hidden subsidy, as consumers of a given imported product are forced to pay higher prices than they are supposed to pay without the trade barrier
Export subsidy (trade promotion) – Various taxes or other measures are often used to promote exports. Consequently, this has constituted subsidies to favoured industries
Procurement subsidy – Subsidies may occur in this process by the choice of products consumed, the producer, the nature of the product itself, and by other means, including payment of higher-than-market prices for goods purchased
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 50
All Rights Reserved
8.5.1 Subsidies (cont.)
Consumption subsidy – Governments provide consumption subsidies in a number of ways: by giving away a good or service, providing use of government assets, property, or services below the cost of provision, or by providing economic incentives (cash subsidies) to purchase or use such goods
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 51
All Rights Reserved
8.5.2 Import Quotas and Voluntary Export Restraints
An import quota is a physical restriction on the quantity of goods that may be imported during a specific period
A global quota is a method used to administer import activities in the international trade
When the specified quota of a product has been filled, further imports of the product will be frozen
In practice, a global quota is unmanageable because both domestic importers and foreign exporters will rush to get their goods shipped into an importing country before the quotas are filled
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 52
All Rights Reserved
8.5.2 Import Quotas and Voluntary Export Restraints (cont.)
It is also disadvantageous to products imported from a distant location because of the longer transportation period, or by a smaller merchant to a bigger one, due to the limited trade connections
In effort to avoid the problems of a global quota system, import quotas are normally allotted to specific countries. This type of quota is known as a selective quota
Selective quotas suffer from many of the same problems as global quotas
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 53
All Rights Reserved
8.5.2 Import Quotas and Voluntary Export Restraints (cont.)
Another feature of quotas is that their use may lead to domestic monopoly of production and higher prices because of limited availability of the goods
A voluntary export restraint (VER) is a promise made by a country in imposing certain restrictions on its exports of a good to another country to an agreed amount or percentage of the affected importing market
Often this is done to resolve or avoid trade conflicts with an otherwise friendly trade partner
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 54
All Rights Reserved
8.5.3 Local Content Requirement
Today, many products, represent worldwide production
Domestic manufacturers of these products purchase resources or perform assembly functions or production activities outside the home country
This practice is known as foreign sourcing (outsourcing) or production sharing
Firms have used foreign sourcing to take advantage of lower production costs offered abroad, including lower wage rates
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 55
All Rights Reserved
8.5.3 Local Content Requirement (cont.)
To limit the negative impact of foreign sourcing practices, certain countries have imposed a local content requirements policy
This policy specifies the minimum percentage of a product’s total production value that must be produced locally
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 56
All Rights Reserved
8.5.4 Administrative Policies
Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country
This is considered an informal approach used by a government in creating trade barriers
These rules have successfully delayed the process of import activities into a country exercising such rules
According to the national trade policy of Tanzania, administrative procedures prevail in developing economies as a response to hard situations at times of natural disasters
Their main impact includes the discouragement of cross-border trade in grains and other food crops, timber and livestock in border regions/ districts
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 57
All Rights Reserved
8.5.5 Antidumping Policies
Antidumping policies are policies designed to counteract dumping practices
Governments of foreign markets often use antidumping policies to protect import competing producers from unfair competition caused by dumping practices
Dumping is recognized as a form of international price discrimination
It occurs when foreign buyers are charged lower prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties
Selling in foreign markets at a price below the cost of production is also considered dumping
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 58
All Rights Reserved
8.5.5 Antidumping Policies (cont.)
Several aims of exercising dumping are to oust competitors from the particular markets, to maintain production in the home market so that the local product’s price are kept high, and also to unload excess production to foreign markets
Numerous methods can be used to measure whether a product is heavily or lightly dumped
The main method is based on the price in the exporter’s domestic market
When this cannot be used, two alternatives are available
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 59
All Rights Reserved
8.5.5 Antidumping Policies (cont.)
The two alternatives are the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses, and normal profit margins
Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country
Therefore, a detailed investigation first has to be conducted according to specified rules
The investigation must evaluate all appropriate economic factors that have a position on the state of the industry in question
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 60
All Rights Reserved
8.5.5 Antidumping Policies (cont.)
If the investigation reveals that dumping is taking place and domestic industries are being hurt, the exporting company can undertake pertinent actions such as raising its price to an agreed level in order to avoid anti-dumping import duty
Anti-dumping investigations are to be concluded instantaneously in cases where the authorities determine that the margin of dumping is insignificantly small, normally when it is defined as less than 2% of the export price of the product
Firms can report to two government agencies when suspected dumping activities take place
International Business© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 8: 61
All Rights Reserved
8.5.5 Antidumping Policies (cont.)
The two government agencies are the Commerce Department and the International Trade Commission
Countervailing duties are another form of duty closely related to antidumping duties
While antidumping duties are imposed to offset injurious dumping, countervailing duties are implemented to off set the injurious subsidization