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Management Core
MGCR 382
John Saba

Lecture 9 Chapter 7: formulation of national trade policies Objective 3: analyse role of domestic politics in formulating country’s international trade policies, 2 parts about WHY i- trade is restricted 1. Econ analysis: rent-seeking & logic of collective action a. Rent seeking is “any activity by firms, individuals or special interests that is designed to change the distribution of income to their favour” i. Political lobbying, legal challenges & bribery are common forms of rent-seeking behaviour, that use resources but DO NOT add to national o/p  rent seeking = net loss to country b. Despite trade protectionism is INEFFICIENT, gov tend to respond to DD of the few who gain from protection but IGNORE DD of many who gain from free trade c. REASON: protection brings concentrated gains to a few & diffused losses throughout entire economy d. [Mancur Olson] Logic of collective action suggests there is an asymmetry in incentives to oppose protectionist trade policy e. Those benefitting from protection (e.g. the few producers) have much greater econ incentives to lobby for it that those hurt by it to lobby against it i. Losers: spread out among MANY CONSUMERS  each consumer pays a very small increase in price  little econ incentive to oppose ii. Winners: concentrated among the few producers & their workers & gov  few winners receive much $$  BIG econ incentive to lobby for 2. Political analysis: Public Choice Analysis (PCA) a. ECON analysis answers this Q: why national gov adopt public policies that hinder IB & hurt their own citizenry overall, even though the policies may only benefit small groups within their societies b. Answer: according to public choice analysis, special interest will often dominate general interest on any given issue for a simple reason  special interest groups willing to work harder for passage of laws favourable to their interests than the general public is willing to work for the defeat of laws unfavourable to its interests c. according to public choice analysis, domestic trade policies that affect IB originate NOT from a great vision of a country’s international duties BUT from process of politicians trying to get elected d. Jones (merchant marine) act i. US federal statute that regulates maritime commerce in US waters & b/w US ports. Specifically it restricts the carriage of goods & passengers b/w US ports to US built, owned & crewed ships ii. i.e. law forbids foreign ships from providing transportation services b/w US ports iii. ADVANTAGES: protects US shipbuilders, increase profits, provides workforce of trained US merchant mariners iv. DISADVANTAGES: increase transportation costs for consumers v. Unintended effect: INTERNATIONAL trips NOT subject to Jones act, hurts Port of Seattle in its competition with Vancouver for cruise ship biz, most Alaska-bound ships travel from Vancouver than Seattle  lose profits vi. PCA suggests consumers will NOT be motivated to pressure elected officials to change Jones Act to save trivial sum, BUT special interests e.g. ship owners & maritime unions will protect it vii. Political effect: congressmen vote with special interests since they know they will be harmed by special interest groups & will NOT be rewarded by general public if they repeal Jones Act e. Toyota’s politics are local i. gives historical perspective on Toyota’s trade & investment strategies for US market ii. early 1980s: as more Jap –made vehicles were exported to US, 2 negative effects in US 1. US domestic automobile manufacturers would lose sales & market share 2. US workers lose high-wage auto jobs iii. Political effect: threat of lost US production blahb lahblahblh……………………………………………………………………………. f. Toyota anticipated these effects  agreed to limit exports (Voluntary Export Restraints), build assembly & parts manufacturing plants in 11 states  create 40,000 jobs, gained political support g. Deliberately spread ops over wide area of US to gain political support should there be renewed effort to impose new restrictions Objective 5: Major tools countries use to restrict trade 1. Economic ideal: free trade a. Theory: econ free trade theories argue that countries should trade with each other (unimpeded by tariffs, quotas, etc) to make the best use of national resources & increase SOL b. Practice: strong correlation b/w market openness & unimpeded free trade AND econ growth with improving national living standards c. Econ theory rationalizes advantages to countries of specialization & gains from FREE trade emphasizing 3 principles: i. Specialization: countries should specialize in production & export those products which they have CA, import others ii. Free trade is POSITIVE sum growth game where ALL countries benefit  increase world production, domestic consumption (prices down, choices up), raising SOL iii. BTE reduce gains of trade  opp of free trade 2. Political reality (trade policy that has elements of protectionism) a. Publicly promoting free trade ideal, in practice protectionist to varying degrees, reduces benefits of free trade b. 2 purposes: raise revenue (developING), protect domestic industries from foreign competition (developED) c. Tariffs & quotas have evolved overtime on a piecemeal basis & do NOT represent a well-integrated position towards industrial devt or protection d. Generally: tariffs negotiated down to low levels by GATT/WTO members e. Exception: tariffs on agriculture (Swiss 44%), textiles & clothing 3. Types of BTE a. Tariff & non-tariff barriers i. Tariff = tax on a good that is imposed by importing country when an imported good crosses country’s international border  INdirect limit on imports ii. Non-tariff barriers = any trade barrier that is NOT a tariff e.g. transparent quotas (& non- transparent barriers such as red tape) iii. Quota = specified max amt of good that may be imported/exported in a given period  DIRECT limit by regulating quantity iv. For china to be in WTO, US given power to set limits on certain Chinese imports (biggest impact on textile & clothings) b. Transparent (tariffs + quotas) & non-transparent (red tape, bureaucracy) barriers i. Transparent BTE clearly defined as a barrier, clearly specified & published in each country’s trade regulations/codes ii. Non-transparent BTE are NOT easily interpreted/understood e.g. rules requiring gov to buy from domestic producers 4. 2 ways of classifying tariffs, 3 Types of tariffs (Revenue, protective, import) a. REVENUE TARIFFS i. Imposed by gov on goods that are not domestically produced, goal => generate tax rev ii. More for developing countries that lack sophisticated tax systems, similar effect to progressive income taxes (more for higher-priced goods) iii. E.g. Cameroon, Congo, Guinea etc collect more than 30% of gov rev from tariffs b. PROTECTIVE TARIFFS [focus, coz more common in developED] i. Imposed by gov on goods to protect domestic industry from foreign competition ii. Effect: increase DD for domestic-made products c. 3 types of Import tariffs i. Ad valorem (developED)  levied as a % of imported good’s market value e.g. GST ii. Specific  specific dollar amt per unit or other standard measure of imported good iii. Compound  combi of above 2 iv. How a good is classified affects tariff rate 1. Q: why is it useful for an importer to seek out an advance tariff classification from US [Canada] Customs service 2. A: if a customs officer subjects goods to higher tariff rate than expected, can reduce/wipe out expected profit margin d. Export/transit (pass through country) tariffs 5. Effects of Tariffs a. Lessen gains from trade b. Change domestic economy’s structure as DD & production switches from foreign -> domestic-made c. Domestic consumers encouraged EITHER to stop buying good OR switch to cheaper domestic-made d. Domestic producers increase o/p of goods that compete with imports e. E.g. Import tariff on foreign-made SUVs [TESTED] f. Effect: foreign producers (Toyota) forced to raise US prices => reducing US sales, US producers benefits from higher DD g. Winners: domestic producers & their dealerships as well as foreign producers who produce in US, suppliers to domestic producers, workers at domestic assembly plants h. Losers: domestic consumers, foreign producers, suppliers & workers overseas, foreign communities in which foreign-made SUVs are manufactured 6. Non-tariffs barriers (any gov regulation other than tariff) a. Quantitative restrictions (trade barriers that impose a numerical limit on quantity of a good that may be imported/exported) i. Quotas 1. Is a numerical limit on qty of good that may be imported into or exported from a country during some time period. Have traditionally been used to protect politically powerful industries such as agriculture, automobiles, clothing & textiles from threat of competition 2. E.g. brazil & China impose import quota on no. of foreign films 3. Import quotas granted to other countries’ firms/gov (benefit EARLY importers as they give these importers Monopoly power & ability to charge higher prices, hurt LATE importers who cannot obtain some goods)  Protect domestic producers by limiting imports  Force outside firms to compete for market access 4. Export quotas granted to domestic producers  Maintain supply of good in home market e.g. limit natural resource export  Limit supply of good into world markets to raise its price 5. World Trade Agreements (like GATT’s Uruguay round) compelled countries to replace quotas with tariff rate quotas (TRQ) 6. Tariff rate quotas (TRQ)  Imposes low tariff rate on limited amount of imports of a good (e.g. after 1 1000 widgets  subjected to HIGH tariff rate)  TRQs of US imports: cotton, sugar, peanut butter  Advantages: importers can increase sales if they’re willing to pay, AND since TRAs are tariffs, easier to eliminate through trade negotiations 7. Effects of tariffs & quotas  Similarities in tariffs & quotas effects i. Decrease in qty of imports + domestic consumption ii. Increase in price paid by domestic consumers + domestic production  Differences i. Tariffs: impose tax  gov receives tariff rev ii. Quotas: impose max legal qty  importer &/or foreign producer makes econ profit that’s equal to gov’s tariff rev 8. US TRA on imported sugar, effects:  WINNERS = US sugar producers (more need for domestic production & higher prices), Sugar Substitute Producers (manufacturers of sweetened products use more sugar substitutes in place of sugar)  LOSERS = those who pay higher prices e.g. US Candy Manufacturers, US soft drink makers, consumers  FOREIGN LOSERS = foreign workers (receive less for crops)  less sold to US, more SS to world  sugar prices FALL ii. 3 types of Numerical export controls 1. Voluntary export restraint (VER) or Voluntary Restraint Agreement [similar effects to import quotas]  Export quota & agreement b/w countries whereby exporting country “voluntarily” agrees (usually at request of importing country) to limit its exports to a pre- specified amt/% of affected market for a defined period
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