INTERNATIONAL TRADE
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 2
In the current era of globalization, almost all countries conduct international trade
activities. This is because international trade plays an important role in economic growth.
This chapter discusses various theories of international trade. The discussion begins with the
patterns and benefits of international trade. It then explains the important theories that explain
why countries conduct international trade.
5.1 International Trade Trends and Patterns:
International trade can be defined as the buying, selling, or exchanging of goods and
services between one country and another (across national borders). International trade is
different from domestic trade, which only occurs within the domestic borders of a country.
One of the benefits of international trade is the availability of a wider choice of products and
services for consumers. In addition, international trade also plays an important role in
creating jobs in many countries. The various benefits of international trade have led to an
increase in the value and volume of trade itself. Indonesia itself is also inseparable from
international trade. The amount of goods exported provides a large profit for local producers.
In addition, Indonesia also imports a lot of manufactured goods.
International trade conducted by countries illustrates the level of dependence between
these countries. Many companies in developed countries conduct buying and selling
transactions with companies in other developed countries. Developing countries that border
developed countries often have a high dependency on richer countries. The existence of
international trade transactions does provide great benefits for the economic development of a
country, but this high level of dependence on international trade can pose various threats
when there is an economic recession. In addition, other threats stemming from political
upheaval also have the potential to harm highly dependent countries.
Trade transactions between countries show a continuous pattern. Trade between high-
income countries accounts for about 60% of total trade in the world. Furthermore, two-way
trade transactions between high-income countries and other countries with middle and lower
incomes account for about 34% of total trade. Meanwhile, trade transactions between middle-
and low-income countries only account for about 6% of total trade in the world.
5.2 International Trade Theory over Time:
Trade between different societies has been going on for thousands of years. But the
reasons for this trade only began to be explained in the 15th century. In this era, people began
to explain why international trade was carried out and how these international trade
transactions could benefit both parties to the trade. Since then, various theories of
international trade have emerged, ranging from the mercantilist theory that emerged in the
mid-15th century, to the new trade theory that emerged in the late 19th century (Figure 5.1).
5.3 Mercantilism:
Mercantilism is a theory of trade that states that countries should accumulate or
accumulate financial wealth in the form of gold. This theory was It encourages exports and
tends to reject imports. This theory states that measures of a country's welfare such as
standard of living and community development are irrelevant. Several countries in Europe
embraced mercantilism from the 15th century until the end of the 17th century. Some of the
countries that adopted this system were England, France, the Netherlands, Portugal and
Spain. The practice of mercantilism was based on the following three main pillars.
1. Trade Surplus:
This system believes that countries should increase their wealth by maintaining a trade
surplus. A trade surplus is a condition when the value of a country's exports is greater than its
imports. The opposite of a trade surplus is a trade deficit, which is a condition when exports
have a smaller value compared to the value of imports. In mercantilism, a trade surplus
means that a country earns more gold (from exports) than it spends (on imports).
2. Government Intervention:
It has been explained in the previous section that the mercantilist system strongly favors
the existence of trade surpluses to increase the amount of wealth of a country. In order to
maintain this trade surplus, it requires an active government role and intervention in
international trade. The mercantilist system believes that the accumulation of a country's
wealth depends on increasing the trade surplus, and not the volume of trade. To increase the
trade surplus, the government sets various policies in the field of international trade. These
policies may include import bans for certain products as well as import restrictions in the
form of tariffs and import quotas.
3. Colonialism:
Countries that adhered to the mercantilist system formed fiefdoms (colonies) with the
aim of obtaining various resources. The resources obtained from these countries or colonies
were then sent to their countries to be used as raw materials for production. Furthermore, the
finished goods produced would be sold back to the colonies at a higher price. Thus,
mercantilist countries tend to build stronger political and economic power compared to other
countries.
Despite its positive benefits, the mercantilist system has many disadvantages. One of the
main problems was that if all nations closed their markets to imports and only encouraged
exports, international trade would be severely restricted. Mercantilist countries believe that
they can only increase their wealth at the expense of other countries (zero-sum game). In
addition, exporting goods at low prices from colonies and then importing goods into those
countries at much higher prices can damage the economies of the colonies.
5.4 Absolute Advantage:
The theory of absolute advantage was developed by a Scottish economist named Adam
Smith in 1776. Absolute advantage can be defined as the ability of a country to produce
goods more efficiently than other countries. In other words, a country that has an absolute
advantage can produce goods more efficiently than other countries producing the same
amount of a particular output or service, but with fewer resources. Smith stated that
international trade should not be restricted by tariffs and quotas. The flow of international
trade should be determined by market forces. Through international trade, countries do not
need to produce all the goods they consume. Each country can concentrate on producing
certain types of goods where they have an absolute advantage in producing them.
Furthermore, for other types of goods that are needed, but not produced can be obtained from
trade activities. To simplify the understanding of the theory of absolute advantage, the
following illustration is used.
There are two countries that produce rice and tea, Indonesia and Australia. Assume there
is no transportation cost between the two countries. In Indonesia, 1 unit of labor is required to
produce 1 ton of rice, while the production of 1 ton of tea requires 5 units of labor. Australia
requires 6 units of labor to produce 1 ton of rice and 3 units of labor to produce 1 ton of tea.
Thus, it can be seen that Indonesia has an absolute advantage in producing rice, while
Australia has an absolute advantage in producing tea.
The absolute advantage theory states that both countries can gain greater benefits by
specializing. For example, Indonesia and Australia agree to exchange (trade) one ton of rice
for one ton of tea, or vice versa. Thus, Indonesia can allocate one unit of labor to produce an
additional ton of rice and exchange it for one ton of tea with Australia. This situation is more
favorable than if Indonesia instead uses one unit of labor to produce 1/5 ton of tea. Similarly,
Australia can also allocate one unit of labor to produce an additional 1/3 ton of tea and then
exchange it for 1/3 ton of rice. This is also more profitable than if Australia allocates 1 unit of
labor to produce 1/6 tons of rice.
5.5 Comparative Advantage:
The theory of absolute advantage has one major problem, which is when a country does
not have an absolute advantage in producing any product. To address this problem, David
Ricardo developed the theory of comparative advantage in 1817. This theory states that if a
country does not have an absolute advantage in producing both products, then specialization
and trade can still benefit both countries. A country is said to have a comparative advantage if
the country is not able to produce goods more efficiently than other countries, but can
produce these goods more efficiently than other types of goods. To facilitate understanding,
the following illustration is used.
As shown in Table 5.2, Indonesia has an absolute advantage in producing rice and tea.
To produce 1 ton of rice, Indonesia requires 1 unit of labor, while the production of 1 ton of
tea requires 2 units of labor. On the other hand, Australia requires 6 units of labor to produce
1 ton of rice and 3 units of labor to produce 1 ton of tea. Although Australia does not have an
absolute advantage in producing either rice or tea, it has advantage comparative advantage in
producing tea. In other words, Australia can produce tea more efficiently than it can produce
rice. Furthermore, both countries still agree to exchange one ton of rice for one ton of tea, or
vice versa. Thus, Australia can gain greater benefits by specializing in tea production.
Australia can allocate one unit of labor to produce an additional 1/3 ton of tea and exchange it
for 1/3 rice from Indonesia. This condition provides greater benefits than if Australia uses
one unit of labor to produce 1/6 tons of rice. So far, the discussion on absolute and
comparative advantage has been based on several important assumptions. First, countries are
assumed to maximize production and consumption. Second, the theory assumes that there are
only two countries involved in the production and consumption of two types of products.
Third, the theory assumes that there are no transportation costs between the two countries
conducting trade activities. Fourth, this theory only uses labor in the production process.
Finally, this theory assumes that specialization does not affect efficiency improvement. All of
these assumptions are irrelevant to reality.
5.6 Proportion Factor Theory:
In the early 19th century, a theory of international trade emerged that focused on factors
of production. The cost of production factors is determined by the interaction between supply
and demand. If the supply of factors of production is greater than the demand, the cost of
factors of production tends to be low, and vice versa. The factor proportion theory states that
countries produce and export goods that require resources that are abundantly available in the
country. Conversely, countries will import goods that require resources that are available in
small quantities in the country. This theory originated from research conducted by
economists named Eli Heckscher and Bertil Ohlin. Thus, this theory is often known as the
Heckscher-Ohlin theory.
Factor theory of production is different from the theory of comparative advantage. This
is because the theory of comparative advantage focuses on productivity through
specialization of production on goods that can be produced more efficiently. On the other
hand, the factor of production theory states that countries should specialize in the production
of goods that require resources that are available in abundance and at a low price. The factor
of production theory divides a country's resources into two categories, namely labor and
capital equipment. This theory states that a country will specialize in the production of
products that are requires labor if the cost of labor is relatively cheaper than the cost of
capital goods.
5.7 Leontief Paradox:
Despite its conceptual appeal, the theory of factors of production is not supported by
studies that examine trade flows between countries. One such large-scale study was
conducted by Wassily Leontief in the early 1950s. Leontief conducted a study to test whether
the United States, which is rich in capital equipment exports goods that require capital-
intensive production techniques and imports goods that require labor-intensive production.
Contrary to the factor theory of production, Leontief's study found that the United States
exported more labor-intensive goods. The paradox between the predictions of the factor of
production theory and the actual trade that occurs is known as the Leontief Paradox. The
results of the research conducted by Leontief are also supported by several other studies in
various countries. One of the reasons for the Leontief paradox is that the production factor
theory assumes that the production factors owned by a country are homogeneous, especially
labor.
5.8 International Product Life-cycle:
The international product life cycle theory was proposed by Raymond Vernon in the
mid-1960s. This theory states that firms start exporting and then foreign investment as the
product moves through its life cycle. The theory also states that for various reasons, a
country's exports will eventually become imports. Although developed in the United States,
this theory can be generalized to various developed countries such as Australia, the European
Union and Japan.
There are three stages that products go through in their life cycle. The first stage is
known as the new product stage. At this stage, the high purchasing power of consumers in
industrialized countries will encourage companies to develop and introduce a new product
concept. At this stage, companies carry out production activities in their home countries and
tend to have low production volumes. This is due to domestic demand and uncertain market
conditions. Although there is no export market initially, export activities will begin at the end
of the new product development stage. The second stage is known as the maturing product
stage. At this stage, both domestic and foreign markets begin to realize the presence and
benefits of the product. Thus, the amount of demand will increase over a long period of time.
When the export value exceeds the total product sales, the company will build production
facilities in other countries with high demand. When nearing the end of the product maturity
stage, the company's products will start generating sales in various developing countries, and
even have manufacturing plants in those countries.
The last stage is known as the standardized product stage. At this stage, high
competition from many other companies that produce the same product will encourage
companies to reduce prices. This is done to maintain the company's existence in the market.
When the market becomes price-sensitive, companies will start looking for production sites
that generate low production costs in developing countries.
5.9 New Trade Theory:
During the 1970s and 1980s, another theory emerged that explained the pattern of
international trade. The theory of regionalization The new trade theory states that (1)
specialization and economies of scale will provide benefits, (2) the first firm to enter a market
can create barriers for other firms to enter the market, and (3) governments have a role to play
in helping firms in each country. Since the new trade theory emphasizes productivity, it is
consistent with the theory of comparative advantage, but contradicts the factor theory of
production.
Based on the new trade theory, when firms specialize in producing certain products,
output will increase as efficiency increases. Firms have fixed production costs such as
research and development (R&D) costs, factory buildings and production equipment that do
not depend on the amount of output produced. This theory states that with increased
specialization and output levels, firms will achieve economies of scale that can reduce the
average cost of production. This is why as firms grow, they reduce prices and force new firms
entering the market to produce the same level of output. Thus, the economies of scale of a
few large firms will create an industry that supports only a small number of firms.
First-mover advantage is a strategic advantage gained by being the first company to
enter an industry. First-mover advantage can create barriers for new firms that want to enter
the market. The new trade theory states that a country can dominate the export of certain
products because it has domestic firms that have a first-mover advantage. Because of the
benefits to the first firm to enter the industry, some entrepreneurs request for government
assistance. They believe that if companies can work together with the government to achieve
certain targets, it can provide great benefits for both parties.
5.10 National Competitive Advantage:
The theory of national competitive advantage was developed by Michael Porter in 1990
to explain why some countries have a competitive advantage in producing certain types of
products. This theory of competitive advantage states that the competitiveness of a country in
a particular industry is largely determined by the industry's capacity to innovate. There are
four elements proposed by Porter that explain the differences in competitiveness of each
country. The four elements are factor conditions, demand conditions, related supporting
industries and firm strategy, structure, and rivalry. The following describes each of these
elements.
1. Factor Conditions:
The factor proportion theory states that a country's resources such as labor force, natural
resources, and climate are the main determinants of the type of products the country produces
and exports. Porter recognizes the value of these resources and categorizes them as basic
factors. However, Porter also recognizes another category of resources known as advanced
factors. Advanced factors include the skill level of the labor force and the quality of
infrastructure in a country. Advanced factors are the result of investments in education and
innovation, including worker training and research and development activities in technology.
2. Demand Conditions
Buyer characteristics in the domestic market also greatly affect competitive advantage. A
sophisticated domestic market will encourage firms to add and develop various product
features and develop new products using more sophisticated technology. Firms operating in
this sophisticated domestic market will experience increased competitiveness.
3. Related Supporting Industries
Companies in competitive industries do not exist by themselves. There are various other
supporting industries that exist to provide the inputs needed by the industry. This is because
profitable firms in competitive industries will form clusters of various economic activities in
the same geographical area. Each industry in the cluster has a role in increasing the
productivity and competitiveness of other industries in the same cluster.
4. Firm Strategy, Structure, and Rivalry
Company strategy and the decisions of company leaders and managers have a
continuous influence on the competitiveness of the company. Every company needs
managers who have a high commitment in producing products with superior quality and
maximizing market share and company profits. Another thing that is no less important is the
industry structure and the level of competition between companies. The higher the level of
competition, the greater the competitiveness of the company. This is because high
competition helps companies to compete with imported goods.
5. Government and Chance
In addition to these four elements, Poter also identifies the important role of government
and opportunities that influence the competitiveness of a country. Governments can improve
the competitiveness of domestic companies and industries through various policies.
Governments in developing countries encourage economic growth by accelerating the
privatization process of state-owned companies. This is because privatization can encourage
companies to grow and have higher competitiveness in the global market. However, certain
events can also pose a threat to a country's competitiveness.
Study 5
Indonesia's Competitive Advantage Strategy Facing AEC
The AEC in the Southeast Asian region does not only create benefits as stated in the case
study in Chapter 4, but there are also possible losses created due to the high competence of
international trade in the market. Examples are cheaper imported products than local products
which will then harm domestic producers, the low understanding of Indonesians about the
AEC, and the level of readiness of Indonesia to face the AEC due to varied regional
development. To overcome this, it is necessary to implement an appropriate strategy by
utilizing the potential that exists in Indonesia. Currently, Indonesia has several potentials such
as a large population, geographic advantages such as abundant natural resources (SDA) of
water and land. These advantages are comparative advantages, especially in deposits that
utilize natural resources and are dominated by the utilization of human labor such as
agriculture or commodities.
As discussed in section 5.10, competitive advantage is the advantage of producing a certain
type of product, and its capacity is largely determined by the innovation of the
product/commodity. Indonesia, which is rich in natural resources, has a diversity of
agricultural and plantation export commodities with high competitiveness, for example,
coffee. Indonesian coffee has mostly obtained international certifications such as starbucks
certification, Utz Certified, RF Alliance, and organic. This potential provides an opportunity
for Indonesia to compete with countries with other advantages such as the Philippines,
Vietnam, and Cambodia that excel in international trade based on comparative advantage.
Not only that, the current conditions of demand, opportunities, supporting industries, and
government support for the development of coffee commodities are positive to support
various types of coffee exports and other processed coffee products. For example, there is a
high demand for beans due to the rise of the coffee processing industry such as coffee-based
drinks/food in the world. The high opportunity for global demand for coffee beans will be
responded to by the Indonesian government through supporting policies such as subsidies to
coffee farmers and ease of certification of various types of local coffee to be eligible for
export.
5.11 Conclusion:
This chapter discusses the various theories of international trade. The mercantilist theory
encourages trade surpluses to increase a country's wealth. This mercantilist theory emerged in
the mid-15th century. Subsequently, the theory of absolute advantage emerged and stated that
countries can benefit greatly through specialization and trade. A country is said to have an
absolute advantage if it is able to produce certain types of products more efficiently than
other countries. Not much different from the theory of absolute advantage, the theory of
comparative advantage also supports specialization and trade activities. A country is said to
have a comparative advantage if the country is able to produce certain types of products more
efficiently than other types of products.
Furthermore, there is the factor of production theory which states that a country produces
and exports goods that require resources that are abundantly available in the country.
However, this theory does not match the actual conditions as described by the Leontief
paradox. After the factor of production theory, another theory emerged known as the
international product life cycle. This theory suggests a three-stage product cycle consisting of
product development, maturation, and product standardization stages. In addition, a new trade
theory was developed that supports productivity and economies of scale. Finally, there is the
product of national competitive advantage proposed by Michael Porter. This theory explains
four important elements that explain the differences in competitiveness of each country. The
four elements are the conditions of production factors, demand conditions, supporting
industries, and the strategy, structure and level of competition between companies.
5.12 Key Terms
⚫
Mercantilism
⚫
Zero-sum game
⚫
Absolute advantage
⚫
Comparative advantage
⚫
Theory of factors of production
⚫
Leontief paradox
⚫
International product life cycle
⚫
New product stage
⚫
Maturing stage
⚫
Standardized product stage
⚫
New trade theory
⚫
First-mover advantage
⚫
National competitive advantage
⚫
Basic factors
⚫
Advanced factors
⚫
Factor conditions
⚫
Demand conditions
⚫
Related supporting industries
5.13 Concept Review
1. Explain pillars important in mercantilism system!
2. What is the main problem with the theory of absolute advantage? Explain!
3. Explain the difference between absolute advantage theory and comparative advantage
theory!
4. Explain the difference between the theory of comparative advantage and the theory of
factors of production!
5. Explain the stages in the international product life cycle!
6. Explain Porter's four elements in the theory of competitive advantage!
7. What is the new trade theory? Explain!
8. What is the Leontief paradox!
9. Explain the reason for the Leontief paradox!
10. Explain what is meant by first-mover
Advantage!
5.14 Questions
1. The theories of absolute and comparative advantage are based on various assumptions.
Explain these assumptions! Why are these assumptions not relevant to actual conditions?
(Explain with examples)
2. Is Indonesia a labor-intensive or capital-intensive country? Explain whether the trade
conditions in Indonesia are in line with the predictions of the factors of production
theory!
3. Describe the condition of advanced factors in Indonesia! Does Indonesia have an
advantage in advanced factors? Explain!
GOVERNMENT AND INTERNATIONAL TRADE
Chapter 5 discusses various theories that explain the pattern of international trade. These
theories aim to explain why international trade takes place. However, the ideas or theories of
international trade are not able to accurately describe the actual conditions that occur.
Although various institutions and organizations have been trying to remove barriers to
international trade, they are still being implemented by some countries. Chapter 6 discusses
the motives behind erecting trade barriers. Furthermore, it will discuss various methods of
government intervention, both in the form of promotion and the establishment of trade
barriers.
6.1 Intervention Government in International Trade:
The existence of free trade patterns characterized by Trade flows (exports and imports) that
occur without trade barriers have provided great benefits to the global economy. However,
governments still have to intervene in the trade of goods and services.
Figure 6.1 shows the various political, economic or cultural motives behind international
trade. The following explains the various motives for government intervention in the flow of
international trade.
1. Political Motives:
The political motives behind government intervention are related to the government's
efforts to maintain employment, maintain national security or respond to unfair trade
practices. The government will intervene if free trade flows lead to job losses in the country.
Similarly, the development of globalization, which creates various risks for domestic
companies, will encourage government intervention.
maintaining national security. This national security relates to the security of society, the
economy and the environment. If a country engages in unfair trade practices such as setting
very high tariffs on imported goods, the government tends to threaten to do the same. In
addition, another goal of government intervention is to gain leverage over smaller countries.
2. Economic Motives:
The most common economic motive behind government intervention in international
trade is to protect infant industries. According to the infant industry argument, small
industries in a country should be protected from international competition until they have
enough competitiveness to compete in the global market. This argument is based on the idea
that as industries grow, so will their ability to innovate, efficiency and competitiveness.
However, this idea has several shortcomings. First, it is difficult to determine which
industries should be protected. Second, government protection limits the industry's incentive
to innovate and reduce production costs. Thirdly, this argument states that small industries
need government funding due to difficulties in obtaining funds in the capital market. In
reality, however, there are many sources of private funding that are willing to invest in
promising industries.
Another economic motive behind government intervention is to achieve a strategic trade
policy. This idea is related to the new trade theory which states that government intervention
can help firms achieve first-mover advantage.
Advantage. Furthermore, this strategic trade policy can provide great benefits in the form of
increased national income. Companies that have first-mover advantage tend to earn large
profits and can have a superior position in the global market. However, this strategic trade
policy also has drawbacks. This is because government assistance can lead to inefficiency
and high production costs in the industry concerned.
3. Cultural Motives:
It is not uncommon for governments to restrict trade flows of goods and services in order
to protect national identity. Culture and trade are interconnected and influence each other.
The various influences of international trade can lead to cultural imperialism. The negative
influence of international trade on the existence of a country's culture can encourage the
government to restrict imports.
6.2 Methods the Government Uses to Pro- mote International Trade:
In the previous section, various motives for government intervention in international
trade were explained. Next, we will discuss the various instruments of government
intervention, which consist of trade promotion and trade barriers.
Figure 6.2 shows four forms of trade promotion that can be done by the government. The
following is an explanation of each of these forms of trade promotion.
1. Subsidies:
Subsidies are financial assistance provided by the government to local producers or
firms, whether in the form of cash payments, low-cost loans, tax concessions, product price
support or other forms. Subsidies aim to help local firms improve their competitiveness with
foreign firms. This can take the form of increased competitiveness through exporting. While
subsidies can be beneficial in the short term, some argue that they have a negative impact in
the long term. These negative impacts can include increased production inefficiencies in
competitive industries. In addition, these subsidies are also detrimental to consumers as they
are generally funded by income taxes.
2. Export Financing:
Export financing is intended to assist companies in financing their export activities. This
is done by providing loans at interest rates that are generally lower than market interest rates.
In addition, the government can also provide loan guarantees for companies. With this
guarantee, companies can more easily obtain loans.
3. Foreign Trade Zone:
Some countries promote trade by creating foreign trade zones (FTZs). FTZs can be
defined as geographical areas where the flow of goods occurs through simpler procedures.
FTZs generally aim to increase the number of jobs through increased trade.
4. Specialized Government Agencies:
Some countries have difficulties in socializing the regulations or policies that have been
set. It is not uncommon for companies to feel confused about whether there is a tariff or quota
policy on the products they are trading. Thus, to overcome this problem, governments
generally establish special agents tasked with promoting export activities. The presence of
these specialized agents is very helpful for small and medium-sized businesses that have
limited resources.
Study 6
Bangga Buatan Indonesia (BBI) Program as a Strategy to Protect Local Products in the
International Market
The free market era in Indonesia has not only created a positive impact on the national
economy such as an increase in foreign exchange through import and export duties and
increased foreign investment into Indonesia, but there are also negative impacts of the free
market on domestic economic activity. Examples are the exploitation of resources by
companies, the displacement of local products with imported products which will lead to an
increase in unemployment and a decrease in national economic growth. To overcome these
risks, the Indonesian government intervenes through policies in the form of promotions or
trade barriers. One of them is the "Bangga Buatan Indonesia" (BBI) program policy.
The BBI policy is an effort made by the government to combine the community, digital
market, and government to support the use of domestic products produced by local MSMEs.
Since the launch of the BBI policy on May 14, 2020, business actors, the public, the
government, and MSME players have been using the hashtag #banggabuatanindonesia in
their social media content. This activity was carried out as a form of support for local
economic actors, especially MSMEs in the era of the COVID-19 pandemic as an invitation to
buy local products to the Indonesian people. Through this program, people unconsciously
voluntarily try to introduce local MSME products that they like/know/are around individuals
to be known and purchased by domestic and foreign communities online. It can be concluded
that the BBI policy is effective as one of the government interventions to protect domestic
economic activity and trade in local products.
6.3 Methods Used by Governments for International Trade Restrictions:
It has already been explained that government intervention can also take the form of
setting trade barriers. There are two main categories of international trade barriers, namely
tariff barriers and non-tariff barriers.
Figure 6.3 shows the various forms of trade barriers, both tariff and non-tariff. These
non-tariff forms can include quotas, embargoes, local content requirements, administrative
delays and currency controls. Each of these forms of trade barriers is explained below.
1. Rates:
Tariffs can be classified into three categories consisting of export, transit and import
tariffs. Export tariffs are tariffs set by the government for exported products or goods. This
export tariff is generally set when the price of the exported product is lower than that of the
exported product with the actual price. Furthermore, transit tariffs are set for products that
pass through a particular country's borders to their final destination or destinations. This
transit tariff has been abolished by international trade agreements. In addition, there are
import tariffs, which are tariffs set on imported goods. This import tariff is divided into three
types, namely ad valorem tariff, specific tariff and compound tariff. Ad valorem tariff is a
type of import tariff that is set at a certain percentage of the price of imported goods. Specific
tariff is a type of import tariff in the form of fees or costs per imported product. On the other
hand, compound tariff is a combination of the two previous types of import tariffs. Generally,
the establishment of these tariffs has two main objectives, namely to protect domestic
producers and generate revenue.
2. Quota:
A quota is a limit on the amount of goods that are allowed to enter (import) or exit
(export) from a country in a certain period. Quotas are the most commonly used type of trade
barrier after tariffs. Generally, import quotas aim to protect domestic firms from more
competitive foreign firms. This is done by limiting the amount of goods that can be imported
during a certain period. On the other hand, export quotas have two main objectives. First,
export quotas aim to maintain the supply of raw materials available in the domestic market.
This motive is generally applicable in developing countries that often export natural resources
used in production activities. Second, export quotas also aim to limit the supply of goods in
the global market in order to increase the price of those goods.
3. Embargo
An embargo is a complete ban on the trade of certain goods. This embargo applies to
both export and import activities. It can be imposed on a specific type of product or on all
products as a whole. It is the most restrictive form of non-tariff barrier and is commonly used
to achieve specific political objectives.
4. Local Content Requirements:
Local content requirements require companies operating in the domestic market to
supply a certain amount of goods or services. This requirement can be a statement that a
certain portion of the final product must consist of domestically produced goods. The purpose
of local content requirements is to force foreign companies to use local resources in their
production activities, particularly labor. These local content requirements are often used by
developing countries to accelerate the industrialization process.
5. Administration Delay:
These administrative delays can take the form of bureaucratic regulations or rules
designed to impede the flow of imported products. These non-tariff trade barriers can take the
form of various government actions such as requiring a product inspection process that can
damage the product, requiring certain papers or other actions. The aim is to discriminate
against imported products. As such, these barriers are also referred to as a form of
protectionism.
6. Currency Control:
Companies that carry out import activities generally require foreign currencies such as
US Dollars, Euros or Yen to pay for the imported products. In other words, when it comes to
the payment process, companies need to do currency conversion. Governments generally
restrict currency conversion activities in order to reduce imported goods. This can be done by
setting an inappropriate exchange rate.
6.4 The Role of International Institutions in Supporting International Trade Promotion:
Extreme economic competition among nations has led to two world wars and created the
worst global economic recession of all time. As a result, economists and policymakers
proposed that countries should come together and establish a trading system that would help
avoid similar occurrences in the future. Subsequently, in 1947, 23 countries came together
and formed the General Agreement on Tariffs and Trade (GATT). Initially, the organization
was quite successful in reducing average tariff rates and increasing the volume of
international trade. However, by 1980, there were trade conflicts that led to an increase in
various forms of non-tariff barriers by up to 50%. In addition, during this period, the services
sector, which was not regulated under the GATT agreement, began to account for an
increasing proportion of international trade.
After the GATT, a new international organization known as the World Trade
Organization (WTO) was formed to regulate trade between countries. The WTO was formed
to replace the GATT, but still adopted various agreements set out in the GATT. The WTO
has three main objectives, namely to help facilitate the flow of goods and services, to help
open new markets and to help resolve disputes between countries.
member countries. Thus, it can be seen that the existence of these international institutions
and organizations greatly encourages international trade.
6.5 Conclusion:
This chapter discusses government intervention in international trade. Government
intervention can be driven by political, economic and cultural motives. Political motives
relate to the government's efforts to maintain employment. Economic motives are the
government's efforts to protect new industries and achieve strategic trade policies. On the
other hand, cultural motives are closely related to the government's efforts to maintain
national identity. Furthermore, government intervention can take the form of trade promotion
or trade barriers. Forms of trade promotion are subventions, export financing, the
establishment of foreign trade zones and specialized government agents. Meanwhile, trade
barriers can take the form of tariff and non-tariff barriers. Some forms of non-tariff barriers
are quotas, embargoes, local content requirements, administrative delays and currency
controls. In addition, this chapter also discusses the role of international organizations in
supporting trade activities.
6.6 Key Terms:
⚫
Free Trade
⚫
Subsidies
⚫
Export financing
⚫
Foreign trade zone
⚫
Specialized government agencies
⚫
Tariff
⚫
Export tariff
⚫
Import tariff
⚫
Transit tariff
⚫
Ad valorem tariff
⚫
Special tariff
⚫
Ompound tariff
⚫
Quota
⚫
Embargo
⚫
Local content requirements
⚫
Administrative delays
⚫
Currency control
⚫
GATT
⚫
WTO
6.7 Concept Review
1. Why do governments intervene in international trade activities? Explain!
2. What are the political motives behind government intervention in international trade?
Explain!
3. Explain what are the economic and cultural motives for government intervention in
international trade!
4. What are the forms of international trade promotion?
5. Explain the negative impact of subsidies!
6. Explain why the government formed a special government agency!
7. Explain what is meant by embargo trade barriers!
8. Explain the purpose of setting local content requirements!
9. What is the difference between an import quota and an export quota? Explain!
10. Explain the role of the WTO in promoting international trade!
6.8 Questions
1. Describe the various forms of trade barriers that exist in Indonesia!
2. Explain the tariff and import quota regulations that apply in Indonesia! Has the
regulation been running well?
3. Find a country that uses local content requirements and explain the role of these
regulations for labor conditions in that country!
