MGMT1101 Lecture Notes - Lecture 9: General Agreement On Tariffs And Trade, Paul Krugman, Trade Barrier
Week 9: International trade policy: WTO and regional economic integration
1. Identify and describe the policy instruments used by governments to influence the
international trade and foreign direct investment
Free trade:
• Where a government does not attempt to restrict what its citizens can buy from another
country or sell to another country
• Many nations commit to free trade in general but tend to intervene to protect interests of
politically important groups
Instruments of trade policy:
Tariffs
• Tax levied on imports that raises the cost of imported products relative to
domestic products
• Specific tariffs: levied as a fixed charge for each unit of a good imported
• Ad valorem tariffs: levied as a proportion of the value of the imported good
Subsidies
• A government payment to a domestic producer incl. cash grants, low-
interest loans, tax breaks and government equity participation
• Subsidies help domestic products compete against low-cost foreign imports
and gain export market
• Consumers typically absorb the costs of subsidies
Quotas
• Direct restriction on quantity of good imported into a country
• Tariff rate quota: Hybrid of a quota and a tariff where a lower tariff is
applied to imports within quota
• Quota rent: extra profit that producers make when supply is artificially
limited by an import quota
Voluntary
export
restraints
• Quotas on trade imposed by the exporting country, typically at request of
the iportig outrs goeret
Local content
requirements
• Requirement that some specific fraction of a good be produced
domestically
• Benefits domestic producers but consumers face higher prices
Antidumping
duties
• Dumping: selling goods in a foreign market below costs of production, how
firms unload excess production in foreign markets
• Predatory pricing: seeks to drive domestic competitors out of business
• Antidumping policies: tariffs designed to punish foreign firms that engage in
dumping
Administrative
policies
• Bureaucratic rules designed to make it difficult for imports to enter a
country
• These rules can hurt consumers by denying access to possibly superior
foreign products
• Embargoes
• Licence fees
• Preferential licensing
• Product standards
• Custom inspection practices
• Discretionary product classifications
• Authorisation procedures
• Multiple exchange rates
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• Health and safety assessments
• Labelling laws
• Government preferred suppliers
Government policy instruments in FDI:
Home country policies:
• Encouraging outward FDI
o Government backed insurance programs to cover major types of foreign investment
risk
o Government financial incentives for FDI
o Elimination of double taxation
o FTA relaxing restrictions on FDI
• Restricting outward FDI
o Virtually all investor countries have exercised some control over outward FDI from
time to time to deal with political concerns or economic crisis
Host-country policies:
• Encouraging inward FDI
o Government incentives to foreign firms to invest in their country
o Incentives motivated by a desire to gain from resource-transfer and employment
effects and to capture FDI away from other potential host countries
o Export processing zones (EPZ) or special economic zones (SEZs)
• Restricting inward FDI
o Entry and establishment restrictions and rules
o Ownership restraints and performance requirements
o Procedural restrictions and discriminatory treatment
2. Identify and evaluate the arguments for government intervention in international trade
and foreign direct investment
Why governments intervene in trade:
• Political arguments: focus on protecting interests of certain groups within a nation (normally
producers), at the expense of other groups (normally, consumers)
• Economic arguments: focus on boosting the overall wealth of a nation (to benefit all)
Political arguments for intervention in trade:
• Protecting jobs and industries
o Usually driven by political pressures from trade unions or industries threatened by
more efficient foreign producers
• National security
o Protect industries (e.g. aerospace or electronics) because they are important for
national security
• Retaliation
o Take action against other countries to force them to remove trade barriers or in
response to their imposition of trade barriers
• Protecting consumers
o From inferior or dangerous foreign products
• Furthering foreign policy objectives
o Build strong strategic relations with other nations
o Puish rogue states that do ot aide iteratioal las
• Protecting human rights
find more resources at oneclass.com
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Document Summary
Week 9: international trade policy: wto and regional economic integration. Identify and describe the policy instruments used by governments to influence the international trade and foreign direct investment. Licence fees: preferential licensing, product standards, custom inspection practices, discretionary product classifications, authorisation procedures, multiple exchange rates, health and safety assessments, government preferred suppliers. Host-country policies: encouraging inward fdi, government incentives to foreign firms to invest in their country. Identify and evaluate the arguments for government intervention in international trade and foreign direct investment. Increased competition can lead to increased productivity growth, product and process innovation, and greater economic growth. Home-country benefits of fdi: balance of payments, benefits from inward flow of repatriated foreign earnings, foreign subsidiary creates demands for home country exports, employment effects. Increase as foreign subsidiary creates demand for home country exports: reverse resource-transfer effect, home country mne can learn valuable skills from exposure to foreign market. Identify and compare the different levels of regional economic integration.
