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Instruments of Business & Trade Lecture 8

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MGT372:INTERNATIONAL BUSINESS

Instruments of Business & Trade

TARIFF

TariffTaxes on imported goods for the

purpose of raising their price to reducecompetition for local producers orstimulate local production.

Ad Valorem Duty

An import duty levied as a percentageof the invoice value of imported goods

Specific DutyA fixed sum levied on a physical unit of

an imported good

COSTS & BENEFITS OF

TARIFFS

A tariff raises the price of a good in thempor ng coun ry an owers n eexporting country.

As a result of these price changes: Consumers lose in the importing country

an ga n n e expor ng coun ry. Producers gain in the importing country

and lose in the exporting country. Government imposing the tariff gains

revenue.

BASIC TARIFF ANALYSIS

Modern governments usually prefer torotect domestic industries throu h a

variety of non-tariff barriers, such as: Import Quotas

Limit the quantity of imports Export Restraints

Limit the quantity of exports

T us w en nations use t ese non-taribarriers, they can influence the pricewhich eventually influences the demandsupply.

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Instruments of Business & Trade Lecture 8

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IMPORT QUOTAS

Import quotas directly restrict the quantityof some good that may be imported into a

.licenses to firms that import.

A quota rent is the extra profit thatproducers make when supply is artificially

limited by an import quota.

by limiting import competition, but theyraise the prices of imported goods becausequantity demanded will exceed quantitysupplied.

VOLUNTARY EXPORT RESTRAINTS

Voluntary export restraints are similar tompor quo as on ra e excep a equota is imposed by the exportingcountry, typically at the request of theimporting countrys government.

VERs are losses for the importingcountry because there is a price tag forthat quota request.

LOCAL CONTENT REQUIREMENTS

A local content requirement demands

to be produced domestically.

LCRs provide a similar protection to theimport quotas. Local content requirementsene omes c pro ucers, u consumers

face higher prices.

Why should governments go for LCRs?

ADMINISTRATIVE POLICIES

Administrative or bureaucratic tradepolices are bureaucratic rules that aredesigned to make it difficult for imports

to enter a country. Examples include, safety requirements,

quality assurance, customs regulations,

meeting religious requirements, delays,formalities, etc.

These policies can act as a form ofprotection and trade restriction.

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Instruments of Business & Trade Lecture 8

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EMBARGOES AND SANCTIONS

Embargo is the prohibition of businessand trade imposed by a particular nationto another nation. It is a legal barrier(not an economic barrier) to trade.

Reasons for embargoes:

Terrorism

Expression of hostility

Punishment

However, embargoes and boycotts are not thesame.

PRICE & EXCHANGE CONTROLS

Price Controls

Government regulationof prices of goods andservices; control of theprices of importedgoods or services as aresult of domestic

political pressures.

Exchange Controls

Controls on the movement of capital in and outof a country, sometimes imposed when thecountry faces a shortage of foreign currency.

WHICH INDUSTRIES ARE

GENERALLY PROTECTED?

Agriculture in the U.S., Europe, & Japan

,Americas sugar quota.

Clothing textiles (fabrication of cloth)

and apparel (assembly of cloth intoclothing)

Automobile (manufacturing resourcessuch as steel, glass, etc)

Electronics (Electrical and technologyproducts for industrial usage)

PREFERENTIAL TRADING

AGREEMENTS

FTA: agreement that allows free trade amongmem ers, u eac mem er can ave s own ra epolicy towards non-member countries

Customs Union: agreement that allows free trade

among members and requires a common externaltrade policy towards non-member countries

Trade creation: occurs when high cost domesticpro uc on s rep ace y ow cos mpor s rom o ermembers.

Trade diversion: occurs when low cost imports fromnon-members are diverted to high cost imports frommember nations.

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ANTI-DUMPING Dumping refers to selling goods in a

foreign market below their costs ofpro uc on, or se ng goo s n a ore gnmarket below their fair market value.

Dumping enables firms to unload excessproduction in foreign markets.

Antidum in olices or countervailinduties) are designed to punish foreignfirms that engage in dumping andprotect domestic producers from unfairforeign competition.

SUBSIDIES Subsidies are government payments to

domestic producers. They can be in theform of:

Cash grants, Low-interest loans, Tax breaks orGovernment equity participation in the company

Subsidies help domesticproducers in two ways:

Help compete againstow-cost oreign imports

Help them gain exportmarkets

Subsidies encourage ordiscourage trade?

INFANT INDUSTRY ARGUMENT

Developing nations may have a potentialcomparative advantage in some industries, but

established industries of other countries.

To allow these industries to establish, theinfant industry argument suggests that anindustry should be protected until it candevelop and be viable and competitiveinternationally.

However, it can be difficult to gauge when anindustry has grown up.

SRATEGIC TRADE POLICY

Strategic trade policy suggests that in

mover advantages, governments canhelp firms from their countries attain

these advantages.

ra eg c ra e po cy a so sugges s agovernments can help firms overcomebarriers to entry into industries whereforeign firms have an initial advantage.

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OTHER INSTRUMENTS OF TRADE

Export credit subsidies

A subsidized loan to exporters

Export-Import banks of a nation subsidizesloan to local exporters

Government procurement

purchase from domestic suppliers, evenwhen they charge higher prices (or haveinferior quality) compared to foreignsuppliers.

POLITICAL ARGUMENTS FORGOVERNMENT INTERVENTION

Concerned with protecting the interestsof certain groups within a nation, oftenat the expense of other groups.

1. Protecting Jobs and Industries

2. National Security

3. Retaliation

4. Protecting Consumers

5. Furthering Foreign Policy Objectives

6. Protecting Human Rights

REVISED CASE FOR

GOVERNMENT INTERVENTION

Retaliation and Trade War

Strategic trade policy provokesretaliation and may result in tradewars, leading to trade distortions

Domestic Politics

Governments do not always act in thenational interest when they intervenein the economy, and are usuallyinfluenced by politically importantinterest groups