International business case study
Cindy Yu
week-9_trade_protection.pptx1
Trade Restrictions
References
Hill, C W “International Business” (6th edit., 2007), Chapter 6
Ball, D et al. “International Business” (11th edit., 2008), Chapter 3
Sloman, John, “Economics” (8th edit) – chapter 24.2
www.europa.eu.int
Trade Restrictions
Having looked at the advantages for trade why is it that so many countries use trade barriers to restrict imports from other countries?
The answer may be found in the actions of lobby groups who represent the interests of domestic producers
There are a number of arguments given for trade restrictions but it may be useful to consider how countries do this first
Trade Barriers
Tariffs – a tax on imports
This works by raising the price of imports relative to domestically produced goods. The government gets the tax revenue from this
Quotas – a restriction on the number or quantity of goods imported
This will raise the price for consumers and benefits domestic producers
The Effects of a Tariff (or a Quota)
Quantity
Q1 Q2 Q3 Q4
Pw + Tax (P2)
Pw (P1)
Price
s
d
Q4 – Q1 are imports before the tariff
Q3 – Q2 are imports after the tariff
R
When a country is open to trade domestic consumers are able to buy the product at the world price Pw
At this price the domestic producers are only willing to produce Q1 but consumers want Q4
The difference Q4 – Q1 is made up from imports
After the tariff raises the world price domestic suppliers will increase production to Q2
Imports fall to Q3 – Q2 as consumers now only want to buy only Q3
The government gains from this the area represented by revenue R
A quota operates in a similar way
The government now only allows Q3 – Q2 imports into the country which creates a shortage
This increases the price from P1 up to P2
In this case the foreign companies lucky enough to have a contract will gain instead of the government
Subsidies
A subsidy is a payment made by the government to a domestic producer
The subsidy can take many forms such as a direct cash grant, low interest loans, tax breaks, location inducements etc.
The subsidy shifts the firm’s supply curve to the right as it lowers production costs for the firm – this causes the price of products to fall making the firm more competitive
As well as helping domestic firms compete against imports the subsidy helps domestic producers compete in foreign markets
This is especially important where a firm is able to secure a ‘first mover’ advantage – once established the firm will be able to take advantage of economies of scale
In doing so the firm may form a natural monopoly
BUT the government may end up footing the bill in the long term especially where domestic producers fail to improve their efficiency
Other Forms of Trade Restriction
Voluntary Export Restraint
The EXPORTING country restricts the level of exports after making an agreement with the IMPORTING country
E.g. a limitation on car exports to the United States enforced by Japanese automobile producers in 1981
Caused by pressure from the US government that limited Japanese imports to no more than 1.68 million vehicles per year (revised upward in 1984 to 1.85 million)
Import quotas and VERs always raise the domestic price of an imported good
It is estimated that the imposition of the voluntary export restraint on cars cost US consumers $1 billion per year between 1981- 85 as the price of imports increased
Local Content Requirement
Requires some proportion of a good to be produced domestically or that local labour be employed
e.g. 75% of engine parts have to be made locally
The effects are similar to an import quota – reduces competition from abroad
Also allows domestic firms to move out of manufacturing components into assembly etc.
Administration Policies
Bureaucratic regulations designed to slow down imports at customs
Such checks can either physically damage the imports or delay their entry so that they would be less demand for the product
The number of staff employed in checking may be made deliberately small or performed in remote locations
Countervailing Duties
Tariffs used to punish foreign firms when they sell excess stock at very low prices
Dumping is defined as selling goods in a foreign market at a price below their costs of production or below their "fair" market value
Producers may use profits from home markets to subsidise prices in a foreign market driving local competitors out
Arguments for Restrictions
There are a number of arguments put forward by countries to justify their restrictions on trade
(1) The Infant Industry Argument – where an industry has the potential to become competitive but has not grown enough to enjoy economies of scale
Protection here may give the industry time to grow and gain experience before being exposed to foreign competition
(2) To prevent dumping – this allows a country to protect itself from unfair competition from very low prices
This may be caused by foreign governments subsidising certain industries to encourage exports from those countries
(3) Retaliation – in response to another country protecting its own domestic industries
(4) To prevent foreign monopolies taking over an industry and then raising prices
(5) To reduce reliance on specialist industries – where a country is over reliant on a few key industries
Fluctuations in price have a dramatic affect on their economies e.g. Cuban sugar, Zambian copper
(6) To protect consumers – health and safety or from genetically engineered crops
(7) Foreign Policy Objectives - preferential trade agreements or to punish ‘rogue’ states e.g. Cuba, North Korea and Iran
(8) Defence or strategic resources – this may involve weapons technology or vital resources such as food, oil or energy
(9) To protect the environment – to force countries to adopt more environmentally friendly ways of producing goods
(10) Workers rights and conditions – to influence countries to adopt more rights for workers e.g. for children or those working very long hours under poor conditions
(11) Strategic Trade Policy
Linked with the New Trade Theory where first mover advantage and economies of scale are important considerations
The government may subsidise newly emerging firms in key areas to give them a head start - this can be in the form of R&D as well as cash subsidies
Also used to catch up with a foreign firm who has a first mover advantage e.g. European governments subsidised the development of Airbus to rival Boeing
Problems with Trade Restrictions
Higher prices for consumers and less choice of goods and services
Tariffs may protect inefficient industries
Retaliation – may provoke trade wars and further increase world prices
Extra bureaucracy – large administration costs
Corruption in the form of bribes by importers or domestic firms
