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©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Chapter 7
Government Policy and International Trade

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©McGraw-Hill Education.

What Is The Political Reality
Of International Trade?

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The Opening Case: U.S. Tariffs on Chinese Solar Panels Benefit Malaysia the decision by the United States and members of the European Union to levy tariffs on solar panels imported from China. China has been accused of subsidizing its solar panel industry in order to gain an unfair advantage and “dump” (export at below-market prices) panels in the United States and elsewhere. The tariffs, however, did not produce the expected results of protecting domestic manufacturing jobs in the U.S. or EU, instead driving global production to Malaysia.

©McGraw-Hill Education.

How Do Governments Intervene In Markets?

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LO 7-1: Identify the policy instruments used by governments to influence international trade flows.

Tariffs are the oldest form of trade policy; they fall into two categories:

  • Specific tariffs are levied as a fixed charge for each unit
  • Ad valorem tariffs are levied as a proportion of the value of the imported good

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How Do Governments Intervene In Markets?

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Tariffs are good for government because they generate revenue.

But, while they protect domestic producers, they reduce efficiency and create higher prices for consumers.

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How Do Governments Intervene In Markets?

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Subsidies are government payments to domestic producers. They can be in the form of:

  • Cash grants
  • Low-interest loans
  • Tax breaks
  • Government equity participation in the company

Subsidy revenues are generated from taxes.

Subsidies encourage over-production, inefficiency, and reduced trade.

©McGraw-Hill Education.

How Do Governments
Intervene In Markets?

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©McGraw-Hill Education.

How Do Governments Intervene In Markets?

Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government

  • Import quotas and voluntary export restraints
  • benefit domestic producers
  • raise the prices of imported goods

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©McGraw-Hill Education.

How Do Governments Intervene In Markets?

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©McGraw-Hill Education.

How Do Governments
Intervene In Markets?

Antidumping Policies–also called countervailing duties–punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition

dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value

enables firms to unload excess production in foreign markets

may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices

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Management Focus: U.S. Magnesium Seeks Protection explores the dumping charged levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium.

©McGraw-Hill Education.

Why Do Governments
Intervene In Markets?

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LO 7-2: Understand why governments sometimes intervene in international trade.

©McGraw-Hill Education.

What Are The Political Arguments For Government Intervention?

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©McGraw-Hill Education.

What Are The Political Arguments For Government Intervention?

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©McGraw-Hill Education.

What Are The Political Arguments For Government Intervention?

Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers

  • if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
  • risky strategy

Protecting consumers from “dangerous” products - limit “unsafe” products

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Country Focus: Trade in Hormone-Treated Beef describes the trade battle between the United States and the European Union over beef from cattle that have been given growth hormones. It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has treated the case.

©McGraw-Hill Education.

What Are The Political Arguments For Government Intervention?

Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with

  • trade policy can also be used to punish rogue states

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The U.S. has used trade policy against countries like Libya, Iran, Iraq, North Korea, and Cuba.

©McGraw-Hill Education.

What Are The Political Arguments For Government Intervention?

Protecting the human rights of individuals in exporting countries - through trade policy actions

Protecting the environment - international trade is associated with a decline in environmental quality

  • concern over global warming
  • enforcement of environmental regulations

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Exercise

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Chapter 7 Cases

  • Go to the introduction of the chapter on page 201 “American Steel Tariffs” let’s discuss this case.

  • Go to page 227 and read the case “The United States and South Korea Strike a Revised Trade Deal” and let’s then look at the questions.