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MGCR 382 (35)
Chapter 9

Chapter 9 – Formulation of National Trade Policies.docx

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Management Core
MGCR 382
Hermann Juergens

Chapter 9 – Formulation of National Trade Policies Rationales for trade intervention: two main issues 1. Protecting domestic firms from foreign competition (trade barriers for imports) 2. Directly helping domestic firm’s exports (export subsidies, government-to-government negotiations, guaranteed loans programs) Free trade  national government exerts minimal influence on the exporting and importing decisions of private firms and individuals Fair trade/Managed trade  national governments should actively intervene to ensure that domestic firms’ exports receive and equitable share of foreign market; imports minimize losses of domestic jobs and market share of domestic firms - government should ensure a “level playing field” *affects all managers and consumers Industry Level Arguments Arguments based on the needs of individual industries - argument for free trade is based on Adam Smith’s arguments o trade will make both parties better off –allocate resources to their highest valued use o self-interest of individuals will make the markets efficient National Defense argument: - country must be self-sufficient in critical raw materials, machinery, and technology; or else they’ll be vulnerable to foreign threats o ex. Japan after WWII  damaged merchant fleets showed that japan was too reliant on imported goods  banned imported rice to promote domestic self-sufficiency - argument appeals to general public (politically appealing)  interest groups use this argument to get protection in their industries - ex. In US –wool industry gets subsidies, as well as steel, electronics, machine tools and merchant marine Infant industry argument: - protecting developing domestic industries from fierce foreign competition using tariffs - ex. Japan –metals fabrication industries (iron, steel, aluminum, copper, zinc)  no tariffs on imported raw ores, tariffs on processed metals - decrease protection as industry matures - Determining which industries are ‘developing’  more political than economic o Industries tend to keep protectionism past infancy—don’t like to give up protection Maintenance of existing jobs: - Domestic firms in high-wage countries are threatened by imports from low-wage countries (affects employment) - Workers will often petition for protection from foreign competition o Quotas, tariffs, indirect trade barriers Strategic Trade Theory Background: - economists claim that protectionism harms the economy o based on absolute advantage and comparative advantage theory Classical theory’s flaws: Absolute and comparative advantage theory doesn’t necessarily apply in real life assumes perfect competition and consumer information symmetry (will buy at lowest price possible), which will create textbook trade benefit relationships Strategic trade theory  makes different assumptions about the industry environment in which firms operates - assumes an oligopolistic market (very few firms worldwide) - allows for monopoly market if firm can succeed - idea: government can make country better off by adapting trade policies to improve competitiveness of the domestic firm in oligopolistic industries - ex. Nuclear power plant industry –payoff matrix National trade policies Arguments based on the needs of the whole economy Economic development programs: (especially important for developing countries) - international business plays major role in development of economy - i.e. reduce over dependence on one export (ex. Ghana’s dependency on cocoa) ex. Post WWII development strategies: (Taiwan, Singapore, south korea) - export promotion strategy  encourage firms to compete in foreign markets by harnessing some advantage the country posses (ex. Low labor costs) - import substation strategy  encourage the growth of domestic manufacturing industries by erecting high barriers to imported goods) *export promotion has generally been more successful Industrial policy: - when the national government identifies key domestic industries critical to country’s future economic growth, then formulates programs that promote their competitiveness o aims to help domestic firms capture large shares of important, growing global markets - government identifies the industries to favour  criticism: they’re not always right o ex. France failed in telecommunications industry, government lost money subsidizing so much o government’s choice depends too much on political factors, rather than the growth potential of industries - main issue: what should be the role of the government in a market economy Public Choice Analysis: Background - government intervention can help special-interest groups, but hurt domestic consumers - ex. US steel tariff 2002  helped domestic steel industry, but hurt workers that were involved with the import of steel (dockworkers) and domestic consumers who had to pay higher prices for things that are manufacturer with steel Public choice analysis  (branch of economics that analyzes public decision making) special interests will often dominate the general interest on any given issue because these groups are willing to work harder for the passage of laws favorable to their interests Barriers to International Trade: 1. Tariff Barriers Tariff  tax placed on a good that is traded internationally - Export tariff  levied on goods as they leave the country - Transit tariff  levied on goods as they pass through one country - Import tariff  levied on imported goods o 3 forms of import tariffs: a) ad valorem tariff  assessed as a percentage of the market value of the imported goods b) specified tariff  assessed as a specific dollar amount per unit of standard measure (ex. Weight) c) compound tariff  ad valorem + specific component *ad valorem is most common o Harmonized tariff schedule (HTS) –detailed classification scheme for imported gods o Tax levied depends on the category the custom official classifies the good as Historical Reasons for Tariffs: 1. raise revenue for government  especially if government finds it hard to collect tax from domestic sources 2. act as trade barrier  raises the price of foreign goods for domestic consumers; increases the demand for domestically produced substitute goods graph: 9.3 2. Nontariff barriers (NTB) Quota  numerical limit on the quantity of a good tha
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