2. OBJECTIVES:
After studying this chapter, you should be able to
1.Explain why governments try to enhance and restrict
trade
2.Show the effects of pressure groups on trade policies
3.Compare the potential and actual effects of government
intervention on the free flow of trade
4.Illustrate the major means by which trade is restricted and
regulated
5.Demonstrate the business uncertainties and opportunities
created by governmental trade policies
6.Discern how businesses may respond to import
competition
7.Fathom how the growing complexity of products and
trade regulations may affect the future.
5. • Trade policies are often
implemented by governments to
achieve various economic, social,
or political goals, even though free
trade has its benefits. Officials aim
to benefit their nation and citizens,
but determining the best approach
is complicated due to uncertain
outcomes.
7. ECONOMIC RATIONALES NON- ECONOMIC RATIONALES
• Fighting unemployment • Maintaining essential industries
• Protecting infant industries • Promoting acceptable practices abroad
• Promoting industrialization • Maintaining or extending spheres of influence
• Improving comparative position • Preserving national culture
8. The unemployed can form an effective pressure group for import restrictions.
Import restrictions to create domestic employment
•May lead to retaliation by other countries.
o Are less likely retaliated against effectively by small economies.
o Are less likely to be met with retaliation if implemented
by small economies.
o May decrease export jobs because of price increases
for components.
o May decrease export jobs because of lower incomes
Abroad
•Possible costs of import restrictions include higher prices and higher taxes.
o Such costs should be compared with those of unemployment
ECONOMIC RATIONALES :
9. Infant- Industry Argument
- used in economics to justify government intervention in
trade.
- The idea is to shield emerging industries from foreign
competition until they become strong enough to compete on
their own in the global market.
- The infant-industry argument says that production becomes
more competitive over time because of
• Increased economies of scale.
• Greater worker efficiency.
ECONOMIC RATIONALES :
10. • Many developing countries try to emulate
this strategy, using trade protection to spur
local industrialization.
• Countries with a large manufacturing base
generally have higher per capita GDPs than
those that do not.
• Specifically, they operate under the
following set of assumptions:
ECONOMIC RATIONALES :
11. Countries seek protection to promote
industrialization because that type of production
1. Brings faster growth than agriculture.
When a country shifts from agriculture to industry,
• Demands on social and political services in cities may
increase.
• Output increases if the marginal productivity of
agricultural workers is very low.
• Development possibilities in the agricultural sector may be
overlooked.
12. 2. Bring in Investment Funds(Investment Inflows )-
Import restrictions, applied to spur industrialization, also may increase
FDI, which provides capital, technology, and jobs.
13. 3. Diversifies the economy - Export prices of many primary products, such as oil and coffee,
fluctuate markedly. Price variations due to uncontrollable factors—such as weather affecting supply or business
cycles abroad affecting demand—can wreak havoc on economies that depend on the export of primary
products.
14. 4. Bring more income
thean primary products
do (Growth in Manufactured)
- This assumption implies that
there's more potential for
growth in industries producing
manufactured goods compared
to those reliant on selling raw
materials.
15. 5. Reduces imports and/or promotes exports ( Import
substitution and Export –Led Development): This suggests that as a
country develops its industrial sector, it becomes less
dependent on importing goods from other countries and can
even start exporting its own manufactured products.
16. 6. Nation Building - Industrialization helps countries build
infrastructure, advance rural development, and boost workforce
skills.
17. -Every nation monitors its absolute economic welfare, compares its performance to
that of other countries, and enacts practices aimed at improving its relative position
-involve various strategies and practices aimed at enhancing a nation's economic
welfare and competitive position in the global market:
Making balance-of-trade adjustments
Two options that can affect its competitive position broadly are:
1. Depreciating or devaluing its currency, which makes basically all of its products cheaper in relation to
foreign products
2. Relying on fiscal and monetary policy to bring about lower price increases in general than those in other
countries Both of these options take time.
ECONOMIC RATIONALES :
18. -involve various strategies and practices aimed at enhancing a nation's economic
welfare and competitive position in the global market:
Gaining comparable access to foreign markets or “Fairness”
Companies and industries often use the comparable access argument, which holds that they are
entitled to the same access to foreign markets as foreign industries and companies have to theirs.
Two practical reasons for rejecting the idea of fairness:
1. Tit-for-tat market access can lead to restrictions that may deny one’s own consumers
lower prices.
2. Governments would find it impractical to negotiate and monitor separate agreements
for each of the many thousands of different products and services that might be traded.
ECONOMIC RATIONALES :
19. -involve various strategies and practices aimed at enhancing a nation's economic
welfare and competitive position in the global market:
Using restrictions as a bargaining tool
-The threat or imposition of import restrictions may be a retaliatory measure for persuading other
countries to lower their import barriers.
Controlling prices
-Price-control objectives refer to strategies employed by countries to influence prices of goods in
international markets. One tactic involves withholding goods from global markets to drive up prices
abroad. This is particularly feasible when a few countries hold significant control over certain resources,
allowing them to limit supply and force consumers to pay higher prices.
ECONOMIC RATIONALES :
20. Export restriction may;
• Keep up world prices.
• Require more controls to prevent smuggling.
• Lead to substitution.
• Keep domestic prices down by increasing domestic
supply.
• Give producers less incentive to increase output.
• Shift foreign production and sales.
21. NON ECONOMIC RATIONALES :
-Maintaining essential industries involves governments implementing trade
restrictions to safeguard key domestic sectors, particularly during peacetime, to
ensure the country's independence from foreign supplies during times of conflict or
emergency.
- This strategy, known as the essential-industry argument, aims to prevent reliance
on foreign sources for critical goods or technologies that are vital for national
security.
The process countries go through when they decide to protect industries deemed
essential for national security or economic stability. It outlines three key steps:
• Identifying which industries are essential.
• Evaluating the costs and exploring alternative measures.
• Considering the political and economic consequences of protecting these industries.
22. NON ECONOMIC RATIONALES :
-Governments use national defense arguments to prevent the export,
even to friendly countries, of strategic goods that might fall into the
hands of potential enemies. They also limit In protecting essential trade
to promote changes in a foreign country’s policies or capabilities.
-While using trade policies to influence acceptable political practices
abroad, governments are also concerned about implications on their
own countries’ businesses.
23.
24. NON ECONOMIC RATIONALES :
-Governments also use trade to support their spheres of influence—giving aid and
credits to, and encouraging imports from, countries that join a political alliance or vote a
preferred way within international bodies.
-Countries maintain their unity and identity by safeguarding their national heritage
and cultural values. They do so by imposing restrictions on the export of art and
historical items considered integral to their identity. Additionally, they may limit
imports of foreign products and services that conflict with their dominant values or
threaten domestic industries that uphold traditional values.
25.
26. There are two main types of trade
control instruments:
• Those that indirectly affect the
amount traded by directly influencing
export or import prices
• Those that directly limit the amount
of a good that can be traded
27. Tariffs
• Tariff barriers directly affect prices, and nontariff barriers may affect either price or
quantity.
• A tariff (also called a DUTY ), the most common type of trade control, is a tax levied
on a good shipped internationally
• Export tariffs – tariffs collected by the exporting country.
• Transit tariffs – collected by a country through which the goods pass.
• Import tariffs – collected by importing countries
28. Import Tariffs - Unless they’re optimum tariffs (discussed earlier in the chapter),
import tariffs raise the price of imported goods by placing a tax on them, thereby
giving domestically produced goods a relative price advantage.
Tariffs as Sources of Revenue - Tariffs also serve as a source of governmental
revenue. Import tariffs are of little importance to developed countries, usually costing
more to collect than they yield.
Criteria for Assessing Tariffs
• Specific duty – a government may assess a tariff on a per unit basis
• Ad valorem duty – may assess a tariff as a percentage of the item’s value
• Compound duty – if it’s both per unit basis and percentage of the item’s value.
29. Nontariff Barriers: Direct Price Influences
Subsidies - Subsidies are a form of direct assistance to companies to boost
competitiveness. Although this definition is straightforward, disagreement on what
constitutes a subsidy causes trade frictions.
Governmental subsidies may help companies be competitive,
- Especially to overcome market imperfections because they are
least controversial.
- But there is little agreement on what a subsidy is.
- But agricultural subsidies are difficult to dismantle.
30. Aid and Loans - Governments also give aid and loans to other countries. If the recipient is
required to spend the funds in the donor country, which is known as tied aid or tied loans,
some products can compete abroad that might otherwise be noncompetitive.
Customs Valuation - Tariffs for imported merchandise depend on the product, price, and
origin—which tempts exporters and importers to declare these wrongly on invoices to pay less
duty.
Valuation Problems - The fact that so many different products are traded creates valuation
problems, especially since new products are coming on the market all the time and must be
classified within existing tariff categories.
Other Direct-Price Influences - Countries use other means to affect prices, including special
fees (such as for consular and customs clearance and documentation), requirements that
customs deposits be placed in advance of shipment, and minimum price levels at which
goods can be sold after they have customs clearance.
31. Nontariff Barriers: Quantity Controls
Quotas - The quota is the most common type of quantitative import or
export restriction, limiting the quantity of a product that can be
imported or exported in a given time frame, typically per year.
Import quotas normally raise prices for two reasons:
(1)to limit supply and
(2) to provide little incentive to use price competition to increase sales.
32. Voluntary Export Restraint - A variation of a quota is the so-called
voluntary export restraint (VER).
Embargoes - A specific type of quota that prohibits all trade is an
embargo. As with quotas, countries or groups of countries may place
embargoes on either imports or exports, on whole categories of
products regardless of origin or destination, on specific products with
specific countries, or on all products with given countries
33. “Buy Local” Legislation - Another form of quantitative trade control is so-called
buy local legislation. Government purchases are a large part of total
expenditures in many countries; typically, governments favor domestic
producers.
Standards and Labels - Countries can devise classification, labeling, and testing
standards to allow the sale of domestic products but obstruct foreign-made ones.
Specific Permission Requirements - Some countries require that potential
importers or exporters secure governmental permission (an import or export
license) before transacting trade.
A foreign-exchange control is similar. It requires an importer to apply to a
government agency to secure the foreign currency to pay for the product.
34. Administrative Delays - Closely akin to specific permission requirements are
intentional administrative customs delays or those caused by inefficiency, which
create uncertainty and raise the cost of carrying inventory.
Reciprocal Requirements - Because of government regulations in the importing
countries, exporters sometimes must take merchandise or buy services in lieu
of receiving cash payment.
Countertrade - Countertrade or offsets are government requirements in the
importing country whereby the exporter, usually in sales (especially military
ones) to a foreign government, must provide additional economic benefits such
as jobs or technology as part of the transaction.
35. Restrictions on Services - Service is the fastest-growing
sector in international trade. In deciding whether to restrict
service trade, countries typically consider four factors:
• essentiality,
• not-for-profit preference,
• standards,
• immigration.
36.
37. When companies face possible losses because of import
competition, they have several options, four of which stand
out:
1.Move operations to another country.
2.Concentrate on market niches that attract less
international competition.
3. Adopt internal innovations, such as greater efficiency or
superior products.
4. Try to get governmental protection.
