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Chapter 6

GMS 724 Chapter Notes - Chapter 6: Export Restriction, Ad Valorem Tax, Asteroid Family

Global Management Studies
Course Code
GMS 724
Lori Anne Heckbert

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Protectionism: governmental restrictions and competitive support
Conicting Results of Trade Policies
Despite free-trade benets, governments intervene in trade to attain
economic, social, or political objectives
O!cials apply trade policies that they reason will have the best chance
to benet their nation and its citizens, and sometimes their personal
political longevity
Economic Rationales for Governmental Intervention
Why governments intervene in trade:
Fighting unemployment Maintaining essential industries
Protecting infant industries Promoting acceptable practices
Promoting industrialization Maintaining/extending spheres of
Improving comparative position Preserving national culture
One di!culty with restricting imports to create jobs is that other
countries, whose production may typically drop as a result, normally
retaliate with their own restrictions
In deciding whether to restrict imports to create jobs, governments
must face the di!cult task of comparing the costs of limiting imports
with the costs of unemployment from freer trade
Persistent unemployment pushes many groups to call for protectionism
oUnemployment is better dealt with through scal and monetary
Infant-Industry Argument: holds that a government should shield an
emerging industry from foreign competition by guaranteeing it a large
share of the domestic market until it can compete on its own
oPresumes that the initial output costs for an industry in a given
country may be so high as to make its output non-competitive in
world markets
oGovernments must identify those industries that have a high
probability of success
It does not necessarily follow that those companies should
receive governmental assistance
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oSome segment of the economy must incur the higher cost when
local production is still ine!cient (IE: paying higher taxes)
Countries with a large manufacturing base generally have higher per
capita GDPs than those that do not
Industrialization Argument: presumes that the unregulated importation
of lower-priced products prevents the development of a domestic
oImport restrictions, applied to spur industrialization, may
increase FDI, which provides capital, technology, and jobs
oA greater dependence on manufacturing does not guarantee
diversication of export earnings
Terms of Trade: the quantity of imports that can be bought by a given
quantity of a country’s exports
Export-Led Development: an industrialization policy emphasizing
industries that will have export capabilities
Industrialization helps countries build infrastructure, advance rural
development, and boost workforce skills
A trade decit creates problems for nations with low foreign exchange
reserves (the funds that help nance the purchase of priority foreign
goods and maintain the trustworthiness of a currency)
oDepreciate/devalue the currency
oRely on scal/monetary policy to bring lower prices
Comparable Access Argument: holds that companies and industries are
entitled to the same access to foreign markets as foreign companies
and industries have to their markets
oCompanies that lack equal access to a competitor’s market will
struggle to gain enough sales to be cost-competitive
The threat of import restrictions may be a retaliatory measure for
persuading other countries to lower their import barriers
oEach country then escalates its restrictions, creating, in e6ect, a
trade war that has a negative impact on all their economies
oIn order to use restrictions successfully as a bargaining tool:
Believability: either have access to alternative sources for
the product or your consumers are willing to do without it
Importance: exports of the product you’re restricting are
signicant to certain parties in the producer country
(parties inuential enough to prompt changes in their own
country’s trade policy)
Countries sometimes withhold goods from international markets in an
e6ort to raise prices abroad
oMost feasible when a few countries hold a monopoly or near-
monopoly control of certain resource and can limit supply so
consumers must pay a higher price
There is the fear that foreign producers will price their exports so
articially low that they will drive producers out of business in the
importing country
Dumping: when companies export below cost or below their home-
country price
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