Global Trade Operations
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Week3LectureSlidesupdated-OMGT2243.pptx6-1
OMGT 2243: Global Trade Operations
Week3: International Trade Instruments and Institutions
Learning objectives
After you have read this chapter, you should be able to:
Describe the policy instruments used by governments to influence international trade flows.
Understand why governments sometimes intervene in international trade.
Describe the development of the world trading system and the current trade issue.
Explain the implications for managers of developments in the world trading system.
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Tariffs
A tariff is a tax levied on imports (or exports).
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.
Tariffs are good for government because they generate revenue.
Two major effects of import tariffs:
Tariffs are unambiguously pro-producer and anti-consumer.
Tariffs protect domestic producers but they reduce efficiency.
Tariffs are bad for consumers because they increase the cost of goods.
Import tariffs reduce the overall efficiency of the world economy.
This is because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad.
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Subsidies
Subsidies are payments provided by a government or its agencies to domestic companies in order to make them more competitive vis-à-vis foreign competitors at home and/or abroad.
Government payment to a domestic producer:
cash grants
low-interest loans
tax breaks
government equity participation in the company.
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiencies in trade.
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Import quotas and voluntary export restraints
Import quota:
Quotas are quantitative limitations on the importation of goods typically spelled in terms of units (e.g., 10,000 shirts) or value (ad valorem).
Quotas may also be established in terms of a market share beyond which either tariff or cessation of imports is triggered.
Some quotas allow for a preset increase, for example, an annual increase of 3 percent. Some quotas allow for a preset decrease
Voluntary export restraint (VER):
Quota on trade imposed by exporting country, typically at the request of the importing country.
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Rule of Origin & Local content requirements
Rule of Origin:
Rule of Origin- Both tariffs and quotas are administered on the basis of their country of origin, for which the default is the first exporting country.
Rule of origin is often an issue of contention, however, because the value added to the product in the transient country may be debatable.
Local content requirements:
Requires some specific fraction of a good to be produced domestically:
Percent of component parts
Percent of the value of the good.
Initially used by developing countries to help shift from assembly to production of goods.
Developed countries (U.S.) beginning to implement.
For component-parts manufacturer, LCR acts the same as an import quota.
Benefits producers, not consumers.
Dumping & Antidumping policies
Dumping:
Dumping is defined by the WTO as selling a product at an unfairly low price.
Because it distorts pricing, dumping interferes with free trade flow.
Dumping undermines the principle of comparative advantage because it may cause the exporting country to specialize in a product or service in which it has no advantage over the importing country.
Antidumping policies:
The problem is that the retaliation, in the form of anti-dumping duties, is often used to protect inefficient domestic producers, thereby producing the opposite impact.
Whereas anti-dumping measures were once almost exclusively applied by developed nations fearing competition from developing and especially emerging economies, they are now taken by developed and developing nations alike.
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Political arguments for intervention
Protecting jobs and industries:
CAP (Europe) and VER.
National security:
Defense industries: semiconductors.
Retaliation:
Punitive sanctions.
Protecting consumers:
Genetically-engineered seeds and crops
Hormone-treated beef.
Furthering foreign policy objectives:
Helms-Burton Act
D’Amato Act.
Protecting human rights:
Most favoured nation (MFN) status.
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Economic arguments for intervention
Infant industry argument:
Oldest argument: Alexander Hamilton, 1792
Protected under the WTO
Only good if it makes the industry efficient
Requires government financial assistance:
Today if the industry is a good investment, global capital markets would invest.
Strategic trade policy
Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies.
Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms.
Implications for international business
Trade barriers and firm strategy:
Trade barriers raise the cost of exporting products to a country.
Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country.
To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise.
All of these can raise the firm’s costs above the level that could be achieved in a world without trade barriers.
Policy implications and the role of business firms:
International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies.
While there may be short run benefits to having governmental protection in some situations, in the long run these can backfire and other governments can retaliate.
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Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm
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Institutions in International Trade
Globalisation and the subsequent growth of international business have prompted the need to establish global and regional agreements to monitor and regulate economic activities.
General Agreement on Tariffs and Trade (GATT) was established to liberalise or gradually eliminate barriers to trade, including tariffs, subsidies and import quotas.
World Trade Organisation (WTO) is an umbrella organisation that governs the international trading system.
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The theoretical case for free trade dates to the late 18th century (Adam Smith and David Ricardo).
Free trade as a government policy was first officially embraced by Britain in 1846 and there had been annual motions in parliament in favour of free trade since the 1820s when David Ricardo was a member.
During the next 80 years or so, Britain pushed the case for trade liberalisation; but its major trading partners did not reciprocate the British policy of free trade.
From Adam Smith to the Great Depression
From Adam Smith to the Great Depression
The only reason Britain kept this policy for so long was that, as the world’s largest exporting nation, it had far more to lose from a trade war than did any other country. Until the Great Depression of the 1930s, most countries had some degree of protectionism.
U.S. stock market collapse in 1929.
U.S. Smoot-Hawley tariff (1930):
Almost every industry had its ‘made to order’ tariff
Foreign response was to impose own barriers
U.S. exports tumbled.
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1947-1979: GATT, trade liberalisation and economic growth
After WWII, the U.S. and other nations realised the value of freer trade and established the General Agreement on Tariffs and Trade (GATT).
The approach of GATT (a multilateral agreement to liberalise trade) was to gradually eliminate barriers to trade, including:
tariffs, subsidies and import quotas.
using ‘rounds of talks’ to gradually reduce trade barriers.
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1980-1993: Protectionist trends
In the 1980s and early 1990s, the world trading system was strained.
Japan’s economic strength and huge trade surplus stressed what had been more equal trading patterns and Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries.
Persistent trade deficits by the U.S., the world’s largest economy, caused significant economic problems for some industries and political problems for the government.
Many countries found that although limited by GATT from utilising tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT.
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The talks focused on several areas:
Services and Intellectual Property
Going beyond manufactured goods to address trade issues related to services and intellectual property, and agriculture.
The World Trade Organization:
it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules
The WTO encompassed GATT along with two sister organisations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
The Uruguay Round and the World Trade Organization
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The Uruguay Round and the World Trade Organization
GATT criticisms:
Economic theories don’t fit the ‘real world’ model.
US global pre-eminence has declined.
Shift from cutting tariffs to eliminating non-tariff barriers angered countries.
‘National Treatment’ or ‘Most Favoured Nation’ status results in inequalities.
Multilateral Negotiations
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The World Trade Organization
The WTO was created during the Uruguay Round of GATT to police and enforce GATT rules.
Most comprehensive trade agreement in history.
164 members in 2018
Formation of WTO had an impact on:
agricultural subsidies (stumbling block: US/EU).
applying GATT rules to services and intellectual property (TRIPS).
strengthening GATT monitoring and enforcement.
WTO Objectives
Administering a forum for trade negotiations
Settling trade disputes
Reviewing national trade policies
Assisting developing countries on trade policy issues through technical assistance and training programs
Cooperating with other international organisations.
WTO offers several other functions: Most-favoured- nation (MFN) treatment and national treatment
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WTO: experience to date
WTO as a global police:
The first decade in the life of the WTO suggests that its policing and enforcement mechanisms are having a positive effects.
Responsibility for trade arbitration:
Reports adopted unless specifically rejected.
After appeal, failure to comply can result in compensation to injured country or trade sanctions.
Expanding trade agreements:
including services and intellectual property.
WTO as of now
Represents more than 90% of world trade.
9 of 10 disputes satisfactorily settled.
Tariff reduction from 40% to 5%.
Trade volume of manufactured goods has increased by at least 20 times.
